David Hardy Glynn v. Commissioner of Inland Revenue

HCIA000005/1987

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HEADNOTE

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Salaries tax - Income - Perquisites - Sections 8(1) and 9(1)(a) of Inland Revenue Ordinance, Cap. 112 - Taxpayer's children at fee paying school - Taxpayer becoming employee - Employer agreeing to pay education costs of taxpayer's children - Employer agreeing with the school to meet future fees - Novation - Whether taxpayer liable to salaries tax on school fees paid by employer.

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In September 1980 the taxpayer was self-employed when he sent his daughter to a fee-paying school ("the school") in England.

On 1st April 1982 the taxpayer became an employee of a company ("the company") under a written contract of employment which provided, inter alia, that the company would pay the education costs of the taxpayer's children.

On 20th April 1982 the company wrote to the school, offering to accept primary liability for fees until further notice. The same day the taxpayer wrote to the school saying he would be secondarily liable by way of guarantee for the fees if the company failed to pay them. The school wrote to the company and the taxpayer on 9th June 1982 accepting the proposed arrangement. Thereafter, the company paid the fees to the school.

The Board of Review ("the Board") upheld an assessment of salaries tax made by the Commissioner of Inland Revenue ("the Commissioner") against the taxpayer of the tax year 1982/83 in respect of the school fees paid by the company, the Board taking the view that in paying the school fees the company was discharging a debt incurred by the taxpayer, and hence was providing the taxpayer with "money's worth” which was taxable.

Held, allowing the appeal, the arrangement concluded between the company, the school and the taxpayer. on 9th June 1982 amounted to a novation which had the effect of extinguishing the taxpayer's liability to the school for fees. From 9th June 1982 onwards, the company, when paying the school fees, was discharging its own debt, not the taxpayer's debt, since there was no longer any privity of contract between the school and the taxpayer in respect of the fees.

Salaries tax is charged in respect of income arising from any office or         employment of profit: Section 8(1), Inland Revenue Ordinance, Cap. 112 ("the Ordinance"). Income includes any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowance: Section 9(1)(a) of the Ordinance.

Income being what "comes in" (Tennant v. Smith [1892] A.C. 150, per Lord MacNaghten at 164), the taxpayer did not receive any income merely because the company sent his daughter to the school free of expense to him. Nothing "came in" as far as the taxpayer was concerned.

The benefit received by the taxpayer could not be converted into money by him, and hence did pot fall within the concept "perquisite" which means either money payments received by the taxpayer or "money's worth" in the sense of benefits in kind capable of being turned into money by the taxpayer (Abbott v. Philbin [1961] A.C. 352; Heaton v. Bell [1970] A.C. 728 and Richardson v. Worrall [1985] S.T.C. 693 applied).

Although the discharge by an employer of an employee's debt is a "perquisite", that was of no significance in the present case since the company in paying the school fees was discharging its own debt, not the taxpayer's (North British Railway Company v. Scott [1923] A.C. 37; Hartland v. Diggines [1925] 1 K.B. 372; Nicoll v. Austin (1935) 19 T.C. 531 and Wilkins v. Rogerson [1061] 1 Ch. 133 explained).

IN THE SUPREME COURT OF HONG KONG

CIVIL JURISDICTION

INLAND REVENUE APPEAL NO. 5 OF 1987

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BETWEEN

Coram: Hon. Rhind, J. in Court

Dates of hearing: 8th, 9th and 10th February 1988

Date of delivery of judgment: 8th March 1988.

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JUDGMENT

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1. This is a taxpayer's appeal from a decision of the Board of Review ("the Board"), confirming an assessment of salaries tax for the tax year 1982/83 in respect of school fees paid for the taxpayer's daughter by his employer.

2. At all material times, the taxpayer has been a partner in a well-known firm of solicitors. It is trite law that a partner cannot be an employee of the partnership (see, for example, Ellis v. Joseph Ellis & Co.⁽¹⁾). No doubt, if anyone were to ask the taxpayer whether he is self-employed, he would state most emphatically that he is. However, for tax purposes, at least, it turns out that the taxpayer is an employee.

3. By some rather fancy footwork, which the Commissioner of Inland Revenue ("the Commissioner") has been prepared to accept, the taxpayer has caused himself to be treated as an employee of a company called Intergroup Limited ("the company") since 1st April 1982. From what I was told in court by the taxpayer's counsel, I gather that the company hires out the taxpayer’s service to the partnership of which the taxpayer is a partner. By the medium of interposing a company between himself and the partnership the taxpayer gets himself treated as an employee. The mechanics of this arrangement by which the taxpayer turns out to be an employee were not explored by the Board. As the Board in its Stated Case found the taxpayer to be an employee, I have to do likewise for the purpose of this appeal. It was certainly no fault of the taxpayer that the full background of how it turns out he is an employee was not laid before the court. The taxpayer, through his counsel, was extremely helpful to the court in supplying information, and I have no doubt he has cooperated fully and frankly with the Commissioner at every stage.

4. Once the Commissioner has decided to treat a taxpayer as an employee, the Commissioner has to accept the full tax consequence flowing from this.

5. On the day the taxpayer became an employee, namely, 1st April 1982, he entered into a written contract of employment with the company. That provided, inter alia, that the company would pay education costs of his children. At the time of entering into that employment contract, the taxpayer already had a daughter at Roedean School in England. He had sent her there in September 1980, and had paid the fees himself.

6. On 20th April 1982, the company wrote to Roedean School saying that it would accept the primary liability for meeting the fees of the taxpayer's daughter until further notice. On the same day, the taxpayer also wrote to Roedean School referring to the company's willingness to be primarily liable for future fees, and saying that if the company failed to pay them, he was willing to be secondarily liable. Roedean School wrote to the company and the taxpayer on the 9th June 1982, accepting the proposed arrangement. There was some intervening correspondence, but that was of no consequence for present purposes in my opinion.

7. In its Stated Case, the Board held that the arrangement I have just described amounted to a novation. While I agree with the Board's conclusion that there was a novation on 9th June 1982, I do not find myself wholly in agreement with the Board's characterisation of how this novation came about. The following is the Board's description of how the novation came about :-

"In our view on 9 June 1982, by reason of the facts stated in paragraph 3.5 above, there was a novation between the three parties concerned whereby the primary liability of the Taxpayer to pay the school fees of his daughter was transferred as a matter of contract to the company, the Taxpayer undertaking a secondary liability to pay the same if the company should make a default. Thus each payment of the school fees by the company represents a benefit to the Taxpayer in the sense that he would have had to pay the same if there had been no such transfer of liability."

Paragraph 3.5 had been as follows :

"Further correspondence on the matter ensued between the school on the one hand and the company and the Taxpayer on the other until 9 June 1982 when the school wrote to the company and the Taxpayer accepting the primary liability of the company to pay the school fees and the secondary liability of the Taxpayer to pay the same in the event of a default being made by the company."

I consider that the Board fell into error when it spoke of the “.......liability of the Taxpayer......” being "...transferred.." (my underlining) "....to the company,...." This idea of a "transfer" of the taxpayer's liability is out of place in the context of a novation. As explained in Chitty on Contract (25th Edition, paragraph 1315, "It should however be noted that the effect of a novation is not to assign or transfer a liability but rather to extinguish the original contract and replace it by another". A consequence of extinguishing original contract is that the liability under it is also extinguished; there then comes into existence a new contract, involving a new liability.

8. In the case before me, the taxpayer ceased to be liable with effect from 9th June 1982 under the contract he had had with Roedean School since September 1980. With effect from 9th June 1982, a new liability arose under a new contract when the company became liable to Roedean School to pay the fees of the taxpayer's daughter. The taxpayer was not a party to this new contract between the company and Roedean School for payment of those fees. Put another way, there was no privity of contract now between Roedean School and the taxpayer in relation to the primary obligation to pay fees which rested on the company alone. Later in this judgment, I will have more to say about the significance of the absence of privity of contract for the purposes of the present case.

9. It so happens that with effect from 9th June 1982, there was also a new contract between Roedean School and the taxpayer : that new contract was one of guarantee. The taxpayer guaranteed to Roedean School he would make good any default by the company. The classic language of guarantee contracts was employed in the exchange of correspondence between the taxpayer and Roedean School. A contention on behalf of the Crown that there was no contract of guarantee between the taxpayer and Roedean School was simply unarguable.

10. Thus, the situation which existed with effect from 9th June 1982 was that the taxpayer was no longer liable to Roedean School under the old contract which was now extinguished, but instead he had taken on a new type of liability, namely, as guarantor under a new contract.

11. At this point, it will be convenient to consider what is the nature of the contract between a fee paying school such as Roedean, and the person who pays the fees. This aspect of the case was not explored by the Board but, in my opinion, should not be disregarded by anyone seeking a sufficiently full understanding of the background of this case to be able to arrive at a correct decision on the tax point involved. I am prepared to take judicial knowledge of the fact touched upon by Mr Payne for the taxpayer that, contractually, children are sent to fee-paying schools on a term by term basis. Such schools require a term's or part of a term's notice of withdrawal of the child from school. Provided the proper notice is given, liability to pay fees ceases on the expiration of the notice.

12. In the present case, the taxpayer, through his counsel, concedes that he was liable to Roedean School to pay his daughter's fees for the Summer term commencing in April 1982. He does not dispute that he is liable to pay tax on fees paid by the company in respect of his daughter for that term.

13. But for the novation, the taxpayer might also theoretically have been treated by Roedean School as inescapably liable for the fees in respect of the Autumn term for 1982 if the taxpayer were required to give a full term’s notice. Without the novation, the taxpayer could, as at the 9th June 1982, have rid himself of all liability to Roedean School with effect from the end of the Autumn term 1982 by giving the necessary notice. The taxpayer was never in a situation where he remained irrevocably committed to Roedean School to go on incurring liability for fees indefinitely. He could bring that liability to an end by appropriate notice. It is pertinent to observe, too, that he was not under any obligation to send his daughter to a fee paying school at all. Some liabilities like, for example, the liability to pay tax on taxable income, year by year as it arises, can never be terminated. Such liability is legislative. Other liabilities, such as contractual liability for school fees, can be terminated by giving the requisite notice. It is necessary to bear in mind that distinction in the present case.

14. Because of the novation, I am of the view that the taxpayer was no longer liable to pay fees to Roedean School after the end of the 1982 Summer term. Even if I were wrong on that because, arguably, he should have given a full term's notice, then, at the worst, such liability for fees would have ceased at the end of the 1982 Autumn term. That could have a bearing on the quantum of tax for which the taxpayer was liable in respect of the year of assessment 1982/83, but does not affect the main point in issue, which is whether, in principle, the taxpayer was liable to pay salaries tax on the school fees paid by the company after the taxpayer ceased to be liable to Roedean School under his old contract with that school to pay the fees.

15. As I have already indicated, the taxpayer, through his counsel, concedes that he is liable to pay salaries tax on the school fees paid by the company for the Summer term of 1982. Is he liable to pay salaries tax on the school fees paid by the company after that? Salaries tax in Hong Kong is charged for each year of assessment on every person in respect of his income arising from any office or employment of profit. Income includes any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowance, whether derived from the employer or others. The last two sentences combine the effect of Section 8(1) and Section 9(1)(a) of the Inland Revenue Ordinance, Cap. 112 ("the Ordinance").

16. Salaries tax in Hung Kong, like income tax in the United Kingdom, is a tax on income. Income is what "comes in". That basic proposition was established by the House of Lords as long ago as 1892 in Tennant v. Smith⁽²⁾, per Lord MacNaghten. In that case it was held that the right of a bank employee (Mr Tennant) to live in the bank's house rent free did not give rise to income. As Lord Halsbury L.C. put it (at page 154):-

"My Lords, to put this case very simply, the question depends upon what is Mr Tennant's income. This is an Income Tax Act, and what is intended to be taxed is income ........ Now it is certainly true that the occupation of a house rent free is not income."

17. By analogy, having your employer send your child to a fee-paying school free of expense to you does not mean you have received any income. A modern reaffirmation of that position by the House of Lords is to he found in Heaton v. Bell⁽³⁾. For any benefit to be taxable, it must be either a money payment, or "money's worth" in the sense that it is convertible into cash. Again, Tennant v. Smith⁽²⁾ and Heaton v. Bell⁽³⁾ are authority for that proposition. There is an observation to similar effect by Scott J. in Richardson v. Worrall⁽⁴⁾ at page 709:-

"Occupation of a house rent free was not, it was said, income: it was neither money nor money's worth. Nor could the taxpayer's right of occupancy be assigned or surrendered or converted into money. It was a benefit in kind which did not attract tax as an emolument."

and again at page 718:-

"There is, on the other hand, considerable difficulty in regarding the right to occupy a house as money's worth in regarding some chattel as money's worth. If chattels or incorporeal rights are to be regarded as money's worth they must be translatable by some means into money. This was the difficulty recognised and authoritatively dealt with by Tennant v. Smith, Wilkins v. Rogerson and Heaton v. Bell."

18. There can be no doubt that it is of immense financial benefit to the taxpayer to have his daughter educated at the expense of the company. There is no problem about putting a money value on this particular benefit in kind. To the taxpayer, the value is the amount of the fees. However, because a benefit has a value to the taxpayer which can be expressed in money terms is not enough to make that benefit taxable. Speaking of such benefits in another House of Lords case, Abbott v. Philbin⁽⁵⁾ Lord Radcliffe said :-

"I think that it has been assumed that this decision (Tennant v. Smith) does impose a limitation upon the taxability of benefits in kind which are of a personal nature in that it is not enough to say that they have a value to which there can be assigned a monetary equivalent. If they are by their nature incapable of being turned into money by the recipient they are not taxable, even though they are in any ordinary sense of the word of value to him."

19. That passage was cited with approval in Heaton and Bell⁽³⁾ by Lord Morris at pages 753, 754 and by Lord Upjohn at page 761.

20. The benefit receivable by the taxpayer from the company in the present case is by its nature incapable of being turned into money by the taxpayer. He cannot go out and sell this right to have his daughter educated by the company. It is a benefit personal to him. Although the taxpayer is relieved of the problem of finding money for his daughter's school fees, nothing "comes in" as the result of his contract with the company insofar as it relates to school fees. This result flows from the meaning attached to the word "perquisites" by the House of Lords, according to which, "perquisites" are only taxable if they are money or "money's worth".

21. The concept of "perquisites" received extensive attention from several of their Lordships in Heaton v. Bell⁽³⁾. This is what they had to say:-

"The question that arises is whether his participation in the car loan scheme would form part of his emoluments so as to come within the wording of the taxing statute. Tax is chargeable on the 'full amount' of the respondent's emoluments. The expression 'emoluments' includes all salaries, fees, wages, perquisites and profits. The tax being a tax upon income or (as Lord Macnaghten said in Tennant v. Smith [1892] A.C. 150, 164) on what 'comes in' the word 'amount' denotes that in order to be taxable a perquisite must either be a cash or money payment or must be money's worth or of money value in the sense that it can be turned to pecuniary account. This conception in regard to the nature of a taxable perquisite was, in my view, revealed in earlier Acts. Thus, under the Income Tax Act, 1918, in reference to the sums to be charged to tax under Schedule E are the words 'the annual amount thereof.' In the Income Tax Act, 1842, in reference to perquisites to be assessed there occurs the word 'payable.' This denotes that the mere fact that a benefit in kind accrues does not mean that there is a perquisite which is taxable. In his speech in Abbott v. Philbin [1961] A.C. 352, Lord Radcliffe said (at p. 378) that it had been generally assumed that the decision in Tennant v. Smith does impose a limitation upon the taxability of benefits in kind which are of a personal nature: it is not enough to say that they have a value to which there can be assigned a monetary equivalent. Lord Radcliffe added: 'If they are by their nature incapable of being turned into money by the recipient they are not taxable, even though they are in any ordinary sense of the word of value to him.'",

per Lord Morris (753, 754).

per Lord Upjohn (760, 761).

"....In my judgment the recipient of a perquisite other than a sum of money can be assessed, and can only he assessed, on the amount of money which he could have obtained by some lawful means by the use or in place of the perquisite.",

per Lord Reid (744).

"....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.",

per Lord Hodson (758).

22. It has been submitted on behalf of the Crown that the word "perquisite" in the Hong Kong revenue legislation should be interpreted differently from the same word in the United Kingdom income tax statutes. It was pointed out by the Crown that the definition of income from employment in Hong Kong is "inclusive" in the sense that section 9(1) of the Ordinance defines income to include "any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite or allowance". However, that affords no distinction between the Hong Kong and the United Kingdom legislation since the latter is also inclusive. One need go no further than Lord Morris's speech in Heaton v. Bell⁽³⁾ at page 753 where he states "Tax is chargeable on the 'full amount' of the respondents emoluments. The expression 'emoluments' includes all salaries, fees, wages, perquisites and profits." The actual legislative provision is the Finance Act 1956, Schedule 2, paragraph 1 which states "Tax under case I ..........[of Schedule E] shall ....... be chargeable on the full amount of the emoluments falling under that Case, subject to such deductions only as may be authorised by the Income Tax Act, and the expression 'emoluments' shall include all salaries, fees, wages, perquisites and profits whatsoever".

23. The Hong Kong legislation defining "income" for the purposes of salaries tax is a slightly simplified form of the United Kingdom's legislation. The Hong Kong legislation includes a reference to "allowance" which has no equivalent in the United Kingdom's legislation, but that slight difference has no bearing on the meaning of "perquisite" in the Hong Kong legislation. An "allowance" is obviously something sounding in money or money's worth, and does nothing to introduce any suggestion that "perquisite" should be interpreted other than as money or money's worth.

24. The word "perquisite" has consistently been given the same meaning by the Courts in England since 1892 - almost a century. Lord Diplock in Heaton v. Bell^(3a) explained how the House of Lords has placed what he described as a "judicial gloss" upon the word "perquisite" which has appeared in various United Kingdom Tax Acts since 1842, confining it to actual money payments and to benefits in kind capable of being turned into money. I now set out the whole of the relevant passage from Lord Diplock:

"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 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 LC 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 Lord Hannen, at p.165, as 'that which could be converted into money'. Lord Halsbury and Lord Watson expressly found their conclusion upon the presence in the definition of 'perquisite' in the statute they were construing of the adjective 'payable' qualifying the 'perquisite' 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 redrafted 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 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."

Lord Reid made observations to a similar effect at pages 744 and 745 of the same case :

"        Income Tax a tax on income and income means money income. The words profits and gains are used throughout the legislation in reference to sums of money. And the passage which I have quoted appears to me to indicate that perquisites here must mean money perquisites, if profits means money profits. There is no provision for the valuation in money of other kinds of advantages which one might call perquisites. In 1842 income tax was at the rate of a few pence in the pound, 'fringe benefits' were unknown for there was no incentive to create them, and it appears to me to be clear that there was no intention to saddle the commissioners with the difficult and at that time unprofitable task of putting a money value on advantages arising out of the employment which did not sound in money........Lord Macnaghten, at p. 165, referred to 'money payment or payments convertible into money'; and he pointed out, at p. 164, that the tax is 'on what comes in - on actual receipts ... not on what saves his pocket, but on what goes into his pocket.' The appellant says all this was obiter and possibly it was. But its authority has been recognised for three-quarters of a century: it was recognised by this House in Abbott v. Philbin [1961] A.C. 352: and even if I had doubts about it, which I have not, I would think it must stand."

25. To my mind, it is virtually, inconceivable that the legislature in Hong Kong intended the courts here to ignore the teachings of the courts in England on the meaning of "perquisite" in the context of defining income. Hong Kong has traditionally prided itself not only on having low rates of tax, but also on having simple tax legislation. Simple tax legislation means that businessmen know where they stand over their affairs. This all helps contribute to Hong Kong's financial success. With such a philosophy behind Hong Kong's tax legislation, it could never have been intended by the Hong Kong legislature that this rather quaint word "perquisite" in the Hong Kong legislation should bear a meaning different from the same word in the United Kingdom legislation. To adopt a different interpretation would border on the perverse.

26. So far, I have only touched upon "money's worth" in the sense of benefits in kind which are convertible into cash. "Money's worth" can also take a different form. It can occur where the employer discharges an employee's debt. There is a whole line of cases establishing that the, discharge of an employee's debt represents taxable "money's worth" to the employee. In other words, such discharge of a debt by the employer is a taxable "perquisite" of the employee. A line of cases which include Hartland v. Diggines⁽⁶⁾, Nicoll v. Austin⁽⁷⁾ and Richardson v. Worrall⁽⁴⁾ are all concerned with the situation where the employer has paid a debt owed by his employee, and the courts have held that the amount of the debt paid by the employer represents taxable income in the hands of the employee.

27. None of those cases affords a basis for treating the school fees paid by the company as taxable income in the hands of the taxpayer in the present case. When the company paid the school fees after 9th June 1982, it was not discharging any debt of the taxpayer, but its own debt. The taxpayer incurred no liability to Roedean School because there was no longer any privity between him and Roedean School in respect of the primary obligation for school fees. It so happens that the taxpayer has guaranted those school fees, but that is under a different contract between him and the school. That involves only a continent liability which would arise if the company defaulted. The company has not defaulted. The taxpayer owed the school nothing (after 9th June 1982), so no debt of his discharged by the company. It is all very neat, and absolutely. water-tight , in my view.

28. The only hope for the Crown (assuming the taxpayer is really an employee) lies in the House of Lords case of North British Railway Company v, Scott⁽⁸⁾. That case was cited by the Board as "clear authority for the proposition that the taxpayer is liable to pay tax on the sums paid by his employer in discharge of a debt notwithstanding a transfer of the liability to pay the debt from the taxpayer to his employer”. The problem about this case from the Crown's point of view is that it is in no way concerned with a contract novation situation.

29. It concerned the taxation of railway employees in Scotland in the last century. Under the Income Tax Act 1842, employees were assessed for tax on their salaries, fees, wages, perquisites or profits from their employment. Employees were themselves responsible for paying the tax direct to the tax authorities. In 1860, an Income Tax Act was passed making special provision for how tax was to be paid in respect of railway employees. Railway companies were required to deduct tax at source from their employees, rather like modern P.A.Y.E. systems, and the railway company then had to pay the tax to the authorities. The railway company was, in its turn, empowered to deduct the tax it had paid from its employees' salaries.

30. The North British Railway Company had a contractual arrangement with its employees to make no deductions from their salaries in respect of the income tax paid by the North British Railway Company on their salaries. To take a concrete example, the North British Railway Company might have been paying one of its employees one hundred pounds per annum, and have paid twenty pounds income tax for him. The question which arose for decision by the House of Lords was whether the North British Railway Company was liable to pay tax solely on the salary it paid its employee, or whether it had to pay on the salary plus the tax. Thus, in the example I have given, was the tax to be computed on one hundred pounds or on one hundred and twenty pounds? The House of Lords held that the tax payable was to be computed on the salary plus the tax i.e. on one hundred and twenty pounds in my example.

31. While agreeing with each other on the result, each of the three Law Lords who delivered a speech in this case did so on a different basis. Lord Dunedin proceeded on the assumption that the North British Railway Company when paying the tax was paying its own debt. (See at page 41). Lord Akinson, however, at page 45, approached the problem on the basis that the North British Railway Company was paying its employees' debts. In a speech which would offend neither of the Law Lords I have just mentioned, Lord Wrenbury expressed the view that the North British Railway Company was paying a debt which was owed not only by itself but also by the employees to the tax authorities. The other two Law Lords, Sumner and Carson, agreed with their three colleagues I have just mentioned, but did not say which one they agreed with. When Pollock M.R., cited North British Railway Company and Scott⁽⁸⁾ in Hartland v. Diggines⁽⁹⁾ in the Court of Appeal (that case, too, subsequently went to the House of Lords) he appeared to share the view of Lord Dunedin that the North British Railway Company had paid its own debt to the tax authorities, because Section 6 of the Income Tax Act 1860 "imposes upon the Railway Company the actual liability to pay the sum.....”. The other two Lord Justices in Hartland and Diggines⁽⁹⁾ expressed no particular view as to whether the North British Railway Company had been paying, its own debt or its employees debt to the tax authorities. When Hartland and Diggines⁽⁹⁾ went to the House of Lords, North British Railway Company v. Scott⁽⁸⁾ was referred to in the speech of Viscount Cave L.C., with whom all the other Law Lords agreed, but no view was expressed as to whether the North British Railway Company was paying its own debt, its employees' debts, or the debt of both of them.

32. For a better understanding of North British Railway Company v. Scott⁽⁸⁾, I will set out the speech of Lord Wrenbury in full. His is the shortest of the three speeches delivered, and, in my view, the easiest to understand. It is as follows:-

"        My Lords, this case was argued upon the sections of the Income Tax Acts, 1842, 1853 and 1860, and not upon the corresponding sections of the Income Tax Consolidation Act of 1918.

Under the First Rule of Sch. E of 1842 the assessment is to be made upon the person having the office or employment 'for all salaries, fees, wages, perquisites, or profits whatsoever accruing by reason of such offices, employments, or pensions.' Under the Income Tax Act, 1860, s. 6, the persons to make the assessment are the Special Commissioners, and they are to assess the duties payable under Sch. E in respect of offices and employments of profit held under a railway company (this being the assessment to be made under Sch. E of 1842) and are to notify the secretary of the company, 'and the said assessment shall be deemed to be and shall be an assessment upon the company, and paid, collected, and levied accordingly,' and it is to be lawful for the company to deduct out of the salary of the officer the duty charged 'in respect of his profits and gains.' These last words are material.

The assessment therefore remains as regards its amount the same as it was under the Act of 1842, and is to be deemed something which it is not (namely, an assessment on the company), and being so deemed is to 'be an assessment upon the company' and to be paid accordingly. The result is that the company becomes debtor for that which would otherwise have been - and seemingly under the Act of 1842 still is - the debt of the officer, and which is measured by the profits and gains of the officer.

In the case before us 'the railway company are under contractual obligation to the officer that they will not exercise their statutory discretionary right to deduct tax from his salary.' In other words, having paid the tax on his income they will not charge him with it. The question is what are the 'profits and gains' for income-tax purposes of an officer employed upon those terms?

If the salary which the officer is to receive net is £100, the 'salaries, fees, wages, perquisites, or profits whatsoever' which form the reward of his service, are the £100 and the contractual benefit that when the company has paid the tax due for his income tax (whose payment is imposed upon the company by the statute) they will not deduct it against him as they might. This is a further valuable consideration or profit accruing to the officer by reason of his office and is a factor in arriving at his assessable income for income tax purposes. His total 'profits and gains' are the aggregate of these sums. The appellants say that by such an assessment the revenue takes tax on tax. Certainly - so it does. But every one who pays 5s. in the pound income tax pays tax not only on the 15s. which he retains, but also on the tax of 5s. which he has to pay. The question for the opinion of the Court is therefore to be answered by saying that the sums paid by the appellants as income tax on the officer's profits and gains form part of the officer's income for income-tax purposes. It follows that this appeal must be dismissed with costs."

33. Unfortunately, the Board, in support of its proposition "that the taxpayer is liable to pay tax on the sums paid by his employer in discharge of a debt notwithstanding a transfer of the liability to pay the debt from the taxpayer to his employer", has cited some passages from North British Railway Company v. Scott⁽⁸⁾ out of context, and, worse still, has totally misquoted a passage. The result of that misquotation is that the meaning conveyed by the Board is the opposite of that conveyed by the Law Lords.

34. Only passages from Lord Dunedin and Lord Atkinson were cited by the Board. What the Board quoted Lord Dunedin as saying was the following :

"Lord Dunedin says at p. 41, '...it was contended that this was a company debt and not the official's debt .... The fallacy of this argument consists in ignoring the fact that though this is a company debt the measure of that debt is not any liability of the company, but is what would be the liability of the official inder Schedule E if that liability were not transferred to the company by the section...'"

35. What Lord Dunedin actually said was the following:-

"....Most of the appellants' argument was rested on the fact that this was a company debt and not the official's debt; and it was contended that the company could not be asked to pay an assessment on an assessment. The fallacy of this argument consists in ignoring the fact that, though this is a company debt, the measure of that debt is not any liability of the company, but is what would be the liability of the official under Sch. E if that liability were not transferred to the company by the section; and the concluding words of the section are strictly accurate when, dealing with the power given to the company to deduct from the salary of the official the sum they have had to pay, they characterise the duty as so paid in respect of his, i.e., the official's, profits and gains."

36. Thus, instead of saying "....it was contended that this was a company debt and not the official's debt.....", what Lord Dunedin actually said was, "Most of the appellants' argument was rested on the fact that this was a company debt and not the official's debt;". The way the Board has quoted the passage, it might make it appear that it was a fallacy to argue that this was a company debt and not the official's debt. In fact, all that Lord Dunedin was saying was that, although it was the North British Railway Company's debt rather than its employee's debt, it made no difference to the amount of tax which the revenue was entitled to collect. That tax would be based on the salary received by the employee plus the tax paid. (In the concrete example I gave earlier, one hundred and twenty pounds). The rather confusing words about “......... the measure of that debt is not any liability of the company but is what would be the liability of the official under Schedule E if that liability were not transferred to the company by the section; ..........." mean no more than that if the employee had had to pay the tax himself, he would have been assessed on one hundred and twenty pounds (in my concrete example), and that was also the figure on which the North British Railway Company would be taxed in the special situation in which it found itself of having to deduct tax at source by virtue of the Income Tax Act 1860.

37. The following quotation from the stated Case contains excerpts from Lord Atkinson:-

"At. p. 44, Lord Atkinson has this to say, '......in truth the sum paid by the company is not a sum outside of the officer's salary or independent of it, but is a part of his salary .... the sums paid by the company to satisfy the debts which those officers respectively owed to the Revenue remain part of the profits and gains those officers derive from the offices they respectively hold and are liable to be assessed to Income Tax....'"

38. The full text of the relevant part of what Lord Atkinson said is as follows :-

".....but Hudson v. Gribble does, I think, establish that if the railway company had, before the Act of 1860 was passed, arranged with the officers of its staff employed for profit as part of the terms of their hiring, that to spare these officers the inconvenience of being each visited by a revenue officer to collect the amount of the income tax for which he was liable, the company would pay in one sum all the income tax for which the staff were collectively liable, and would set off against the salary of each officer the sum paid to the revenue on his behalf, the entire salary of the officer would have been assessed for income tax. No deduction would have been allowed for the tax so paid by his employer on his behalf. I think the same result would have followed even if the company, either from benevolence or from any other motive, declined to set off the amount they had paid for, or on behalf of, an officer in discharge of that officer's statutory liability, because in truth the sum paid by the company is not a sum outside of the officer's salary or independent of it, but is a part of it, and if the employer did not set off this sum against the employee's salary, the latter would simply pocket his full salary, his debt to the revenue having been paid by another, not by himself, that is all.

Now, it appears to me that the Act of 1860 does little more than embody in a statutory form such an arrangement as I have indicated. The duties payable under Sch. E in respect of all offices and employments of profits held under the company are to be assessed; but the only duties assessed and charged under Sch. E are the duties annually charged on persons having, using, or exercising the offices or employments of profit mentioned in the schedule. And that charge is measured in this way. It is to be payable for all wages, fees, perquisites, or profits whatsoever accruing in respect of or by reason of such offices, etc. - each assessment in respect of such office or employment to be in force for one year. The amount with which the officers are charged and for which they are assessed must be ascertained for the purposes of the Act of 1860, else the indicated retention from or the deduction from their salaries never could be properly made. It would he a mistake, in my view, to hold that the officer is not assessed. He must be assessed, for it is the duty charged in respect of his profits and gains that is to be retained or deducted. Then-for the purpose of the collection of the sums due by those officers of the company - their separate assessments are deemed to be an assessment of the company, one assessment, and to be paid and collected accordingly. By this last provision the company is thus made responsible for the debts, thus lumped together, of their individual officers, and obliged to pay them, and then they can, by retaining out of, or deducting from, what they owe to each officer the sum so paid, recoup themselves for their outlay in this respect. Whether the company avails itself or not of the means provided by statute to enable it to recoup itself for its outlay in paying the debts of its officers is its own concern. Its action in that respect cannot in my view, affect prejudicially the rights of the revenue. The sums paid by the company to satisfy the debts which those officers respectively owed to the revenue remain part of the profits and gains those officers derive from the offices they respectively hold and are liable to be assessed to Income Tax, just as the amount of the income tax deducted by a railway company from the dividends it pays its shareholders is part of the income of those shareholders. In truth the whole scheme of the statute amounts to applying the common and convenient method of deducting income tax at the source. I accordingly think that the question submitted in the case as stated for opinion of the Court was rightly answered by the First Division of the Court of Session.

The appeal, I think, fails and should be dismissed with costs."

39. It will be recalled that Lord Atkinson was the only one of the three Law Lords to base his decision on the assumption that the North British Railway Company in paying tax for its employees was discharging the debts of those employees. What Lord Atkinson did there was to construe the effects of the Income Tax Acts of 1842 and 1860. As a matter of statutory interpretation, he held that under those Acts, the North British Railway Company had to pay the income tax its employees owed, and in assessing what the North British Railway Company had to pay, one took into account not only the employee's salary (in my example, one hundred pounds) but also the tax (twenty pounds) which the North British Railway Company paid on its employee's behalf.

40. Lord Atkinson's approach envisages, in effect, a transfer of the liability from the taxpayer to his employer, which was the Board's mistaken idea of what happens where there is a novation of a contract. This idea of transferring a liability from a taxpayer to his employer is to be found in paragraphs 7.1, 7.2, 7.4 and 7.5 of the Board's Stated Case. However, novation is not concerned with the transfer of debts or liabilities, but rather their extinguishment.

41. Because of the provisions of the Income Tax, Acts 1842 and 1860, it was possible to think in terms of transferring debts in the North British Railway Company and Scott⁽⁸⁾ case, but that case has simply nothing to do with novation. Although there are some incidental references to the law of contract in that case, none of them relates to any aspect of novation.

42. The Board's proposition that a "taxpayer is liable to pay tax on the sums paid by his employer in discharge of a debt notwithstanding a transfer of the liability to pay the debt from the taxpayer to his employer" is probably correct so far as it goes, but does not assist the Crown in a situation like the one involving the taxpayer and the company here, where there is no transfer of liability, the taxpayer's liability under the old contract with Roedean School having been extinguished.

43. It will only be in the rarest of cases that there will be such a transfer of liability. On Lord Atkinson's view, the interaction of the particular facts of the North British Railway Company and Scott⁽⁸⁾ case together with the Income Tax Acts of 1842 and 1860 gave rise to such a transfer. There was, however, no such transfer between the taxpayer and the company in respect of his daughter's school fees.

44. The Crown thought it could find some support for its position in Nicoll v. Austin⁽⁷⁾, as interpreted by Lord Evershed M.R. in Wilkins v. Rogerson⁽¹⁰⁾.

45. In Nicoll v. Austin⁽⁷⁾, a householder entered into an agreement with his employer under which, inter alia, the employer was obliged to pay all outgoings in respect of the householder's, house such as rates, insurance, electric light and telephone, as well as to maintain the gardens in proper condition. For the year of assessment in question, the employer expended £314 in total in respect of those obligations. The householder was held correctly assessed to tax on that £314 on the basis it represented "money's worth" received by the householder.

46. From the judgment in that case, it is clear that the employer had discharged the householder's liabilities for the outgoings such as rates, insurance, electric light and telephone. The householder being directly responsible for those liabilities, the employer's discharge of them was a straightforward application of the principle laid down in Hartland v. Diggines⁽⁹⁾ that the discharge of an employee's debt represents money's worth received by the employee.

47. However, the judgment is not clear on whether the gardener was employed by the householder, and consequently on whether the liability of the householder in respect of the gardener's wages was being discharged by the householder's employer. Scott J. in Richardson v. Worrall⁽⁴⁾ (at page 713) thinks it can be inferred that the gardener was employed by the householder and I agree with him, but Lord Evershed M.R., as I have indicated, was not prepared to make that inference in Wilkins v. Rogerson⁽¹⁰⁾. He took the view he did not know who in fact employed the gardener.

Lord Evershed M.R. observed:-

"....But, as the judge pointed out, there is no doubt that Mr Austin (the householder) got the benefit; and there may well be no other way of assessing the value than by reference to what was in truth paid for the upkeep of the garden."

48. That passage according to the Crown implies that Lord Evershed was of the view the householder was taxable on the basis of the benefit he got from having his Garden done, regardless of whether the householder was liable for the gardener's wages. On that basis, according to the Crown, the householder was liable for tax, although nothing, "came in", to use Lord McNaghten's words in Tennant v. Smith⁽²⁾ and although there was no money's worth to the householder in the sense of a pecuniary obligation discharged. By analogy, in the present case, the taxpayer would be taxable on the benefit of having his daughter educated at his employer’s expense, although nothing "comes in" to the taxpayer as the result of this, and although he is not liable for her school fees.

49. I am not prepared to construe that isolated passage from Lord Evershed's judgment as if it were a statute, and, in any event, if Lord Evershed intended it to mean what the Crown now says it means, it flies in the face of what Lord Radcliffe said in Abbott v. Philbin⁽⁵⁾:

"I think that it has been assumed that this decision (Tennant v. Smith) does impose a limitation upon the taxability of benefits in kind which are of a personal nature in that it is not enough to say that they have a value to which there can be assigned a monetary equivalent. If they are by their nature incapable of being turned into money by the recipient they are not taxable, even though they are in any ordinary sense of the word of value to him."

I do not propose to repeat the passages from Heaton v. Bell⁽³⁾, approving what Lord Radcliffe had said.

50. In sum, I do not think Nicoll v. Austin⁽⁷⁾, nor Wilkins v. Rogerson⁽¹⁰⁾ assists the Crown's position at all.

51. On the other hand Wilkins v. Rogerson⁽¹⁰⁾ is of assistance to the taxpayer in the context of privity of contract, which, as I indicated earlier, is of significance in the present case.

52. I will quickly summarise the facts of Wilkins v. Rogerson⁽¹⁰⁾. There, employers decided to make a gift of a suit of clothes to each of their employees. The employers requested Montague Burton Ltd to supply each employee with a suit and authorised each employee to order a suit from Montague Burton Ltd. The bills for the suits were to be sent to the employers. One of the employees, was assessed to tax under Sch. E on the cost of his suit, £14.15s. Danckwerts J. and the Court of Appeal held, firstly, that since the employers' gift was a gift not of the price of the suit but of the suit itself, the employee could not be taxed on the cost of the suit; but, secondly, that since the suit was a saleable commodity in the hands of the employee, he was taxable on its market value in his hands. The saleable value of the suit in the hands of the employee was agreed to be £5. Accordingly, the employee was taxable in respect of that sum. This decision represents, therefore, an application of the Tennant v. Smith principle that a benefit in kind is not taxable except to the extent that it can be converted into money or moneys worth. Had the employee himself contracted with Montague Burton Ltd for his suit and had his employers discharged his liability by paying the £14.15s.to Montague Burton Ltd, the employee would have been taxable on the £14.15s. The discharge of his debt would have represented the receipt by him of money's worth for tax purposes. Similarly, in the case now before me if the taxpayer had himself contracted with Roedean School from 9th June 1982 onwards to send his daughter there, and had the company then discharged his liability by paying the fees, the taxpayer would have been taxable on those fees. The discharge of his debt would have represented the receipt by him of money's worth for tax purposes.

53. However, with effect from 9th June 1982, the taxpayer did not incur any further debts to Roedean School because of the novation which had taken place. There was no longer any privity of contract between the taxpayer and Roedean School for school fees. (That is not to say there was no privity of contract from 9th June 1982 onwards between the taxpayer and Roedean School under the guarantee, but that was. a contract different from the one for school fees.)

54. This is what Donovan L.J. had to say in Wilkins v. Rogerson⁽¹⁰⁾ (at page 146) in relation to privity of contract and its impact on the employee's tax situation:-

"         The proposition was stated thus: Where an employer offers to spend money for an employee as a reward for service; and that offer is accepted, the employee is liable to be taxed on the money so spent, and not on the thing which the money provides for him. A good many qualifications would need to be added to that proposition to make it true. It looks true in cases like Hartland v. Diggines and Nicoll v. Austin, where money liabilities of the employed officers were discharged by the employer. But what the officers were really taxed upon was the money's worth of the immunity they were thus given from their own liabilities. No valuation of that money's worth was required, it was obviously of the same value as the liability which had been discharged.

In the present case the taxpayer never became liable to pay the £14. 15s. to Messrs. Montague Burton. Between him and them there was no privity of contract at all; and when the employers paid this sum, they discharged heir own liability, and nobody else's."

55. That final sentence echoes the taxpayer's position in the case now before me; between him and Roedean School there was no privity of contract at all in respect of the school fees; and when the company paid this sum, it discharged its own liability and nobody else's.

56. For the sake of completeness, I will quote what Scott J. in Richardson v. Worrall⁽⁴⁾ (at page 710) said about Wilkins v. Rogerson⁽¹⁰⁾:-

"It is relevant to notice that in Wilkins v. Rogerson there was no contract for the purchase of the suit between Montague Burton Ltd and the taxpayer/employee. Danckwerts J. commented that if the employee had contracted to purchase the suit and had then received a gift from his employers of the £14.15s. needed to defray Montague Burton's bill, he would have been taxable on the sum of £14.15s. Donovan L.J. in the Court of Appeal stressed that there had never been any privity of contract between the employee and Montague Burton Ltd. When the employers paid Montague Burton Ltd the £14.15s. they were, he pointed out, discharging their own debt and not the debt of their employee."

57. Assuming that the taxpayer is an employee, there is nothing out of the ordinary in his receiving a benefit in kind which is not taxable in his hands. The position was felicitously expressed by Rowlatt J. in Machon v. McLoughlin⁽¹¹⁾, who was simply following the principle established in Tennant, v. Smith⁽²⁾:-

"If a person is paid a wage, with some advantage thrown in, you cannot add the advantage to the wage for the purposes of taxation, unless that advantage can be turned into money ......"

58. In England, the position is stated as follows in Whiteman v. Wheatcroft on Income Tax (2nd Ed.), one of the leading textbooks on U.K. income tax, at paragraph 14-24:-

"Benefits in kind

Income Tax under schedule E is charged on the emoluments of an employment which are either paid in cash or are in a form which can be converted into money. Accordingly, benefits received by an employee which cannot be converted into, money, such as free accommodation, free travel or free meals, are not on general principles assessable to tax."

59. To that list could, no doubt, be added free education.

60. Free education does get an explicit mention in the context of employees' tax free benefits in kind in what is probably Hong Kong's leading textbook on income tax, "Hone Kong Revenue Law" by P.G. Willoughby, at paragraph 2.01/9.18:-

"'perquisite' A 'perquisite' has been stated to be something that benefits a person by going into his own pocket (Pook v Owen (1969) 49 TC 571 at 592). The term includes not only money but also anything representing money's worth. However, it has long been established that only those benefits in kind that are capable of being turned into money are taxable (Tennant v. Smith [1982] AC 150 at 156). Benefits that are not convertible into money such as free travel, free board and. lodging (see Daly v. IRC (1934) 18 TC 64), free servants employed by the employer, free meals, free uniforms, free education and free medical treatment are not taxable in the absence of special statutory rules. Such rules exist in relation to rent free or subsidised housing (see section 9(1)(b) and (c) infra) but subject to this the basic principles established by case law mainly in the United Kingdom will apply (see for example Heaton v. Bell [1970] AC 728 value of right to car loan scheme which could be exchanged for a higher salary was a taxable benefit; Clayton v. Gothorp [1971] 1 WLR 999 value resulting from the discharge of an obligation to repay a loan was a taxable benefit; Jenkins v. Horn [1979] STC 446 payment of employee's salary in gold sovereigns having a face value less than the gold gave rise to taxable benefit on the difference). The value of a right to subscribe for shares at less than their market value is clearly a benefit and has been held taxable (see Weight v. Salmon (1935) TC 174 (HL) and BR 27/69 IRBRD 8). However, share and stock options are now covered expressly by section 9(1)(d) and 9(4). An additional charge under section 9(1)(a) is excluded by section 9(5). Where an employer provides a taxable perquisite in the form of an asset the value for Salaries Tax purposes is the value to the employee and not the cost to the employer (Wilkins v. Rogerson [1961] Ch 133 new suit given to employee who was held taxable only on the second hand value). Under the rule in Nicholl v. Austin (1935) TC 531 the discharge by an employer of a pecuniary obligation owed by an employee is 'money's worth' and taxable. In Nicholl v. Austin a company paid various overheads in relation to a director's residence and the amount paid was held to be a taxable benefit. However, where it is in the employer's interest that an employee lives in a large enough residence to allow for the entertainment of business associates and outgoings are paid by the employer, all or part of the sums involved may be treated as incurred for the benefit of the employer and not as a taxable perquisite of the employee (see Luke v. IRC [1963] AC 557; Westcott v. Bryan [1969] 2 Ch 324). A common illustration of the rule in Nicholl v. Austin occurs where an employer pays his employee's Salaries Tax or pays a salary expressed to be free of Salaries Tax. In such cases the tax paid is itself a perquisite and must be added to the salary for the purpose of determining the gross income of the employee (Hartland v. Diggines [1926] AC 189). The proper way of doing this is to agree to a gross salary inclusive of tax and pay only a net sum to the employee the balance being the Salaries Tax. Where an employee's salaries Tax is paid or reimbursed separately the effect is to gross up the total salary for Provisional Salaries Tax progressively each year. Payment by an employer of premiums due under an employee's life policy (Richardson v. Lyon (1943) 25 TC 497) and the taking up of shares by an employer on behalf of an employee (Parker v. Chapman (1928) 13 TC 677) have also been held to be 'money's worth' and taxable. However, in Barclays Bank Ltd v. Naylor [1961] Ch 7 a liability incurred by an employee in respect of a child's school fees was discharged by the trustees of a fund, established by the employer, the income of which was payable to the employee's child. In these circumstances the income was held not to he that of the employee and therefore not taxable even though the child's income arising from the fund was used to discharge the employee's pecuniary obligation. This decision has been followed in Hong Kong on similar facts (see BR 6/70 IRBRD 16). It seems that the principle in Barclays Bank Ltd v. Naylor is still applicable in Hong Kong although no longer in the United Kingdom following legislation in 1976 (see and compare Wicks v Firth [1982] 2 WLR 208).

61. The point is also covered in D. Flux's "Hong Kong Taxation : Law and Practice 1984-85 Edition" at page 64 :-

"         It has however been further held that 'cash equivalents' may be taxable at their face value if they in fact enable an employee to make independent purchases, even if they can only for example be spent at one store, because they nevertheless represent money's worth. The classic example is gift vouchers or luncheon vouchers (Laidler v. Perry 42 TC 351). If however an employer provided free meals at his own canteen or contracted for an independent restaurant to supply free meals to employees this would not he taxable because it could not be converted into cash. Similarly, if an employee has the use of a company car and is not entitled to sub-let it to any other person, he is not taxed because he cannot convert the benefit into cash. Other examples of non-taxable benefits are:-

Provision of free medical benefits.

Use of furniture and domestic equipment owned by employer.

Provision of domestic servants employed by the employer.

Provision of gas, electricity and telephone services.

It should be noted however that in all of these cases it is an essential element of the freedom from tax that the liability for the provision of the services is contracted for and paid for by the employers."

62. Another example of a non-taxable benefit would, of course, be provision of free education benefits.

63. There is really no room for serious argument that if an employer in Hong Kong has agreed with an employee to provide free education for the employee's children by the employer contracting and paying for that education, no taxable benefit will accrue to the employee.

64. If the company, qua employer, had contracted with Roedean School to pay the fees before the taxpayer's daughter was first sent there in September 1980, it is inconceivable the Commissioner would have suggested the taxpayer was liable to pay salaries tax on the fees. Likewise, if, say, the taxpayer had withdrawn his daughter from Roedean School for the term commencing January 1983, but then in the term commencing April 1983 the company, pursuant to its obligations under its agreement with the taxpayer dated 1st April 1982 to pay the education costs of the taxpayer's children, had contracted with Roedean School for the taxpayer's daughter to go there and the company had then duly paid the fees to Roedean School, it is clear in those circumstances, too, that the taxpayer would bear no liability to pay salaries tax on those fees. Saying, too, the taxpayer had ceased to be a partner in his firm and gone to work as an employed solicitor for one of the big hongs with a free education benefits scheme on 1st April 1982. If, pursuant to such a scheme, that imaginary hong had written to Roedean School on 20th April 1982 saying that thenceforth it would accept the liability for meeting the fees of the taxpayer's daughter, it is hard to imagine that the Commissioner would have tried to mount an argument that the taxpayer should pay salaries tax on those fees.

65. What is so special then about the actual position in the present case where, (so the Commissioner admits), the taxpayer became an employee on 1st April 1982, and his employer, the company, concluded a contract with Roedean School on 9th June 1982 under which the company was thereafter liable for the fees?

66. Although prepared to swallow the camel that, generally, employees working for employers providing free education schemes are not taxable on those benefits, the Commissioner in the present case has chosen to baulk at the gnat that the taxpayer, qua employee, wants to start taking advantage of the free educational benefits offered by his employer, the company. Is this employee (the taxpayer) for ever to be denied the tax advantages which the Commissioner sees his way to allowing other employees whose employers operate similar free education scheme? The answer is "No". Novation, by eliminating the privity (and hence the liability) between the taxpayer and Roedean School has brought about the state of affairs that with effect from 9th June 1982 the company, not the taxpayer, has been liable for Roedean School's fees.

67. In the branch of the law with which the presnt case is concerned, it is well recognized that two principles operate. One is that benefits in kind are not liable to salaries tax, unless they can, in one way or another, be turned by the employee into money. The other is that the discharge of an employee's debt represents money's worth received by the employee. The declaration of those two principles can be found in Richardson v. Worrall⁽⁴⁾ at page 713. The Crown in a written outline of the submission to be made to me acknowledged those two principles.

68. Instead of confining itself to those two principles, the Crown in its oral submissions resorted to a somewhat desperate attempt to invent a new basis for taxation. In so far as I understood it, the Crown's argument went something like this. The employment agreement dated 1st April 1982 between the company and the taxpayer was enforceable. If the company defaulted in paying the school fees for the taxpayer's children, the taxpayer could sue the company in respect of such default, the measure of his damages being the amount of the school fees. Because money equivalent to school fees could come into his hands in the form of such damages, he should pay salaries tax on an amount equivalent to the school fees.

69. That argument suffers from two fatal defects. The first is that the taxpayer has not in fact been paid any damages so there is nothing, to tax. Nothing has "come in", to use the time-honoured words of Lord Macnaghten in Tennant v. Smith⁽²⁾. The other fatal defect is that such damages would not fall under the relevant charging section of the Ordinance, in this instance, section 8(l), since they would not arise from the taxpayer's employment but instead flow from breach of contract. There is a wealth of authority on the topic of the taxability of damages for breach of service contracts. A few cases to be going on with are Chibbett v. Robinson⁽¹²⁾; Hunter v. Dewhurst⁽¹³⁾; and Henley v. Murray⁽¹⁴⁾.

70. A weak attempt was made by the Crown to clutch at one final plank in the storm. It was suggested that if I were to pay heed to "the substance" of the matter I would see, in effect, that the contract between the company and Roedean School concluded on 9th June 1982 together with the guarantee between the taxpayer and Roedean School was a transparent device for the company to discharge the taxpayer's debt to Roedean school.

71. In this context the Crown referred me to the following passage from Hochstrasser (H.M. Inspector of Taxes) v. Mayes⁽¹⁵⁾:-

"        The question is one of substance, not form. I accept, as I am bound to do, that the test of taxability is whether from the standpoint of the person who receives it the profit accrues to him by virtue of his office: see Reed v. Seymour, 11 T.C. 625, and Herbert v. McQuade, 4 T.C. 489. I do not doubt that a taxable profit may take the form of the discharge of an employee's obligation as well as of a direct payment (cf. Hartland v. Diggines, 10 T.C. 247), nor that a lump-sum payment to directors may in some circumstances, just as in other circumstances it may not, be subject to tax."

72. Crown Counsel was, however, quick to dilute the effect of that passage by immediately referring me to the following from Richardson v. Worrall⁽⁴⁾ at page 716:-

"        Accordingly, it seems to me, the so-called substance of the transaction does not provide an answer to the question whether there is or is not a taxable emolument. The form of the transaction in fact carried out may be critical. To put the point another way, the substance of the transaction is that the employees have received valuable perquisites. Whether they are taxable in respect thereof depends, in cases like the present, on the form of the transaction."

73. An approach based on the so-callen substance of a transaction has availed the tax authorities little since at least the case of I.R.C. v. Westminster⁽¹⁶⁾. Mr Payne, for the taxpayer, was not slow to remind me of Lord Tomlin's oft-quoted words in that case:-

"Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow taxpayers o may he of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of 'the substance' seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable."

74. I am satisfied that in the present case the taxpayer has ordered his affairs in such a way that he is not liable to salaries tax on the fees the company paid to Roedean School for his daughter's education.

75. If the Commissioner really wants to knock this type of scheme on the head, it is hopeless to come to court and start complaining about "the substance" of the transaction. That type of approach has failed consistently for over fifty years. The Commissioner is not, however, without weapons. Modern anti-avoidance measures have been provided by the legislature to put a stop to tax wheezes. In particular, there is now section 61A of the Ordinance.

76. As with the employer's "ingenious" scheme commented on by Lord Diplock in Heaton v. Be11⁽³⁾ at page 762, the company in the case before me has managed to pay the school fees for the taxpayer's children "partly at the expense of the general body of taxpayers" by, no doubt, deducting those school fees in the computation of its own profits for tax purposes.

77. The taxpayer accordingly wins on this appeal to have the Board's decision reversed. He thus avoids having to pay salaries tax on the school fees the company has paid for his daughter.

78. This being a reserved judgment in writing delivered pursuant to Order 42, Rule 5B of the Supreme Court Rules, I make an order nisi as to costs which is that they are to follow the event.

(1)    [1905] 1 K.B. 324

(2)    [1892] A.C. 150, 164.

(2a)    [1892] A.C. 150,

(3)    [1970] A.C. 728.

(3a)    [1970] A.C. 728, 763.

(4)    [1985] S.T.C. 693.

(5)   [1961] A.C. 352, 378.

(5a)    [1961] A.C. 352.

(6)    (1926) A.C. 289.

(7)    (1935) 19 T.C. 531.

(8)    [1923] A.C. 37

(9)    [1925] 1 K.B. 372

(10)  [1961] 1 Ch. 133, 145.

(11)  (1926) 11 T.C. 83.

(12)  (1924) 9 T.C. 48.

(13)  (1932) 16 T.C. 605 (HL).

(14)  [1950) 1 All E.R. 908.

(15)  38 T.C. 673, 706.

(16)  [1936] A.C. 1.

Representation:

Mr. Ian Payne with Miss C. van der Eb (inst'd. by M/s Hampton, Winter & Glynn) for the Appellant.

Mr. Bernard Whaley, Senior Crown Counsel with Miss M. Yuen, Crown Counsel for the Respondent.