Allock v HM Inspector of Taxes [2003] UKSC SPC00396 (29 December 2003)

Income tax – Benefits-in-kind –Threshold of £8,500 – Income and Corporation Taxes Act 1988 sections 167, 142, 158 – Whether car fuel scale charge under section 158 was to be aggregated with credit card payments chargeable under section 142 – Normal reading leads to unfairness – Statutory interpretation – Whether section 167(2) can be read so as to avoid unfairness – Application of principles in Chevron v IRC and Bibby v Prudential – Application of principles in Inco Europe v First Choice Distribution

THE SPECIAL COMMISSIONERS

	MRS J ALLCOCK	Appellant

	- and -

        RICHARD KING
	(HM INSPECTOR OF TAXES)    	Respondent

				Special Commissioner:   GRAHAM AARONSON QC

Sitting in London on 23 March 2003

Michael Reader, Chartered Accountant, instructed by Rowleys, for the Appellant

Peter Death, Inspector of Taxes, for the Respondent

© CROWN COPYRIGHT 2003

DECISION

Overview

1.	This case brings to light an anomaly – and a very unfair one – in the benefits-in-kind provisions.  To fall within the scope of these provisions a person needs to be a “higher paid” employee.  This means, broadly, that he must have employment income exceeding £8,500 per year.  (It might be noted that for someone in full-time employment this is just over the national minimum wage).
2.	The anomaly arises in calculating the amount of the taxpayer’s employment income for this purpose.  The process required is to take his salary, and then to add to it the value of relevant expense payments and benefits-in-kind.
3.	The dispute in the present case turns on whether this process requires there to be taken into account both the value of the notional car fuel allowance and the value of payments actually made by the employer for the car fuel used.  This, of course, involves a kind of double charging, since the notional car fuel allowance is meant to be in place of the actual expenditure on car fuel.
4.	At this point it is worth mentioning that if someone falls within the category of “higher paid” employment, then there is no actual double charge: the notional car fuel allowance is brought into the charge to tax and the actual payments for the fuel are not.
5.	In contending that both the notional car fuel allowance and the actual payments made by the employer for car fuel have to be aggregated to see whether a taxpayer is “higher paid” Mr P J Death for the Revenue accepted that there is no justification as a matter of policy for such a curious result.  However, he said that this is what the law currently requires, and that is the end of it so far as this case is concerned.
6.	With the greatest reluctance I have concluded that the Revenue’s contention is correct in law and, despite the persuasive submissions on behalf of the taxpayer, there is in law no escape from the trap that the statutory language has set.
7.	Given the obvious injustice of the result, and the Revenue’s acknowledgment that there is no justification for it, I would hope that this anomaly will be quickly addressed, preferably by statutory amendment but, if not, then by a concessionary practice statement in some form or other.  Hopefully the taxpayer in this case, who has brought the anomaly to light and who is suffering its consequences, would be offered the protection given by any such amendment or concessionary statement.
The relevant facts and issues in the present case
8.	The taxpayer in this case is Mrs J A Allcock.  The years of assessment under appeal are 1998-1999, 1999-2000 and 2000-2001.
9.	During those years she was employed by a firm of accountants called John Rowley & Co.  From her employer she received a salary, the use of a car and the provision of petrol for the car.  The petrol was paid for by using the employer’s credit card.  It is this last detail which causes the problem.
10.	In 1976 a new system of charging income tax and benefits-in-kind was introduced.  It applied to employees in director’s or higher-paid employment (section 61 FA 1976).  “Higher-paid employment” was defined as employment with emoluments at the rate of £5,000 a year or more (section 69(1)(a) of that Act).  In determining whether the emoluments of an employment exceeded that sum it was expressly provided that the value of benefits-in-kind – which would be chargeable to tax under those new provisions if the emoluments exceeded that figure – were to be taken into account (sub-section (2) of Section 69).
11.	The same concept has been continued to the present day, with equivalent legislation relevant to the present appeals being found in Chapter II of Part 5 of the Income and Corporation Taxes Act 1988.  Section 154 ICTA is the current version of what was section 61 FA 1976, and section 167 ICTA 1988 is the current version of what was section 69 FA 1976.  As noted earlier, the current threshold for the benefits-in-kind charge is emoluments (including the value of benefits-in-kind) in excess of £8,500 per year.
12.	I shall need to look closely at the provisions of section 167, and in particular sub-section (2), because it is the meaning and effect of that sub-section which lies at the heart of the problem.  But before doing so I shall briefly describe the problem and set out a table of the relevant figures which shows how that problem has given rise to the dispute in the present case.
13.	In broad terms the problem is this.  If an employee is chargeable to tax on benefits-in-kind under Chapter II of Part 5 ICTA 1988, then that charge includes what is called the cash equivalent of the use of a car provided by the employer (section 157 and Schedule 6 ICTA 1988), and also the cash equivalent of fuel provided by the employer (section 158).
14.	So far so good.  There is, however, another provision, not in Chapter II of Part 5, which needs to be taken into account.  This is section 142, which is headed “Credit-Tokens”; and so far as is relevant to the present case it has the effect of treating as emoluments the cost of items bought using a credit card provided by the employer.  In the present case Mrs Allcock used the credit card provided by her employer to purchase petrol for the car.  This had the result therefore of treating the cost of the petrol as an emolument under section 142.
15.	As the table set out below shows, Mrs Allcock’s salary plus the car benefit under section 157 plus the car fuel benefit under section 158 in each of the 3 years came to a total a little below the £8,500 threshold.  If matters stopped there she would not be in “higher-paid” employment, and therefore the car benefit and fuel benefit would not be chargeable to tax.  Instead she would be chargeable on her salary and on the credit card payments (chargeable under section 142 which, as I have already noted, is outside Chapter II of Part V, and therefore is not dependent on total emoluments exceeding the £8,500 threshold).
	A	B	C		D		
Tax
Year	Salary	Car Benefit	Fuel Benefit	Assessable
Total	Credit card
payments	Section
167(2)
Total	
1998-99	3,440	3,670	1,010	8,120	491	8,611	
1999-00	3,495	3,126	1,495	8,116	812	8,928	
2000-01	3,125	3,148	2,170	8,443	843	9,286	

16.	As a matter of common sense one would think that you do not take into account both the cash equivalent of the car fuel benefit (£2,170 for the last of the years under appeal) and the credit card payments used to purchase that fuel (£843 for the same year).  This would be double accounting.
17.	But that is what the Revenue says is precisely the effect of the legislation, and that there is no escape from it.  If this is right the unfair consequence is that the total amounts which have to be taken into account mean that Mrs Allcock is indeed in “higher-paid employment” and therefore has to pay tax on the car benefit and fuel benefit.
18.	Whether this is right depends upon the meaning and effect of sub-section 167(2) ICTA 1988 together with the other provisions to which that sub-section refers.
The relevant legislation
19.	The critical provision is sub-section 167(2).  But to put this in focus one first needs to read sub‑section (3) of section 157 – the section which imposes the benefits-in-kind charge for car use.  This sub-section has the express purpose of avoiding a duplication of charge where any benefit relating to a car might also give rise to a charge under some other provision.  So far as is relevant to this case, that other provision would be section 142, i.e. where the benefit relating to the car is provided by using an employer’s credit card.  Sub-section (3) is in the following terms –
“Where in any year the benefit of a car is chargeable to tax under this section as the employee’s income [as it is in the present case] he shall not be taxable –
(a)	…
(b)	under section 141 or 142 in respect of any non-cash voucher or credit-token to the extent that it is used by him –
(i)	for obtaining money which is spent on goods or services in connection with the car; or
(ii)	for obtaining such goods or services;
(c)	…”
The meaning of this seems to be clear.  Where, as in the present case, an employee is subject to the scale charge under section 157 for the use of the car, then that employee shall not be taxed under section 142 in respect of purchases made using an employer’s credit card, where the purchases are for items relating to the car.  In the present case the item purchased with the use of the credit card was petrol, the petrol is an item clearly connected with the car, and hence there is to be no separate charge under section 142 in respect of the cost of that petrol; the sole charge relating to the petrol is therefore imposed under section 158.
20.	I now turn to sub-section 167(2).  This provides as follows –
“[For the purpose of determining whether the employment is at the rate of £8,500 a year or more] emoluments are to be calculated –
(a)	on the basis that they include all such amounts as come, or would but for section 157(3) come, into charge under this Chapter or section 141, 142, 143 or 145, and
(b)	…”
21.	The words “or would but for section 157(3)” seem, as a matter of a plain and straightforward reading, to have the effect of cancelling the exclusion of sums paid by use of an employer’s credit card for items connected with the car (including petrol), so that both the charge in relation to the credit card under section 142 and the fixed charge in relation to car fuel under section 158 have to be aggregated, together with any other emoluments or benefits-in-kind, in seeing whether the £8,500 threshold is exceeded.
22.	On that plain reading of section 167(2) Mrs Allcock is taken over the £8,500 threshold in each of the three years of assessment under appeal.
The respective arguments of the parties
23.	At the oral hearing of these appeals Mrs Allcock was represented by Mr Michael Reader (a chartered accountant).  He valiantly tried to escape from the grasp of the critical words – “or would but for section 157(3) come into charge under … section … 142” – by contending that sub-section 157(3) did not cover petrol at all, but only items relating to the availability of the car.  This seemed to me to be an unacceptably restrictive rendering of sub-section 157(3), which refers simply to goods or services “in connection with the car”.  In my opinion that must include the obtaining of petrol which is used as fuel for the car.
24.	For the Revenue Mr Death submitted that the legislation means what it says and has to be given effect in accordance with its terms.  The plain terms of sub-section 167(2) lead inescapably to the conclusion that both the cost of the fuel paid for by means of the employer’s credit card and the cash equivalent of the petrol charged as a benefit in kind under section 158 were to be aggregated in seeing whether the £8,500 threshold is crossed.
25.	At the oral hearing I expressed my interim conclusion that the wording of the legislation unquestionably led to the conclusion for which Mr Death contended, and that if matters ended there the appeal would have to be dismissed.  However, as Mr Death was frank enough to concede, the consequence in a case such as this was unexpected, and could not readily be explained on any grounds of policy.
26.	In the light of this I invited the parties to consider whether recent developments in statutory interpretation might enable or require the legislation to be interpreted in a way which did not lead to this unexpected and, in my view, unfair result.  Mr Reader and Mr Death were happy to consider the point and let me have written submissions in due course.
Recent developments in the interpretation of statutes
27.	There were three cases which I asked the parties to consider.  The first was Chevron –v- IRC [1995] STC 712.  That case concerned an esoteric element of petroleum revenue tax, but the particular issue centred on the meaning of a very unesoteric word – “the” - as part of the expression “the oil to which those qualifying tariff receipts relate”.  There is no need to go into the facts or legislation in that case.  It is sufficient to note that the dispute centred on whether “the” oil referred to all of the oil passed down a particular pipeline in the North Sea or only so much of the oil as gave rise to a carriage charge (or “tariff”).  On the plain meaning of the legislation “the” oil referred to all the oil passed through the pipeline.  However, viewed in the overall context of the tax charge concerned this would have led to an unexpected result: the intention must have been to refer to only that part of the oil for which a carriage charge would be made.
28.	The Special Commissioners decided that it was their duty to apply the wording of the relevant provisions, and the plain meaning of those words was that the reference was to all of the oil.  They expressed themselves in this way –
“There being no absurdity, or injustice or capriciousness in either of the two interpretations, we think it our duty to apply the wording of the relevant provisions, without regard to any equity or intendment or any supposed purpose or policy (save perhaps if we consider that there is an equivocation or ambiguity in the wording).”  [at page 721b]
29.	In the High Court Sir John Vinelott rejected this approach.  At page 721d he said this –
“In my judgment the first part of this passage reflects an unduly narrow approach to the construction of the 1983 Act.  The fundamental principle was stated by Lord Wilberforce in a well known passage in W T Ramsay Limited –v- IRC [1981] STC 174 at 179, [1982] AC 300 at 323:
‘A subject is only to be taxed on clear words, not on “intendment” or on the “equity” of an Act.  Any taxing Act of Parliament is to be construed in accordance with this principle.  What are “clear words” is to be ascertained upon normal principles; these do not confine the courts to literal interpretation.  There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded …’
It can never be right to look at a specific provision in a taxing Act, any more than in other legislation, in isolation and to resort to the context and scheme of the Act as a whole, only if that provision taken in isolation gives rise to an apparent equivocation or ambiguity.  The question whether a literal construction gives rise to an absurd, unjust or capricious result can be answered only if the particular provision under consideration is placed in its setting as part of the legislative scheme.  The question must always be whether it can be read in a way which, taken as part of the Act as a whole, produces a coherent and reasonable result.  There may be cases where ‘to achieve the obvious intention and produce a reasonable result [the court] must do some violence to the words’ (see Luke –v- IRC [1963] AC 557 at 577, 40 TC 630 at 646 per Lord Reid); or, without doing violence to the words used, the court may be able to avoid an unreasonable result by the importation of an implied restriction covering the scope of a particular provision as in O’Rourke (Inspector of Taxes) –v- Binks [1992] STC 703.  There is nothing new or revolutionary in this approach to construction, although in recent years no doubt greater emphasis has been placed on the need to discern the legislative purpose and to fit the particular provision under consideration into a reasonable and coherent scheme and less upon semantic delicacy.” [my underlining].
30.	The sentence which I have underlined in that passage is, in my view, critical: the question is whether the legislation can be read in a way which produces a coherent and reasonable result.  I shall revert to this in a moment.
31.	In the case of Bibby –v- Prudential Assurance [2000] STC 459 a similar problem of interpretation arose.  The context there was the meaning and effect of section 95 ICTA, which prevented dealers from receiving a tax credit in respect of a distribution arising from the buy-back of a company’s own shares.  In broad terms the expression “dealer” in this context was a defined as a person who would have been chargeable to tax under Case I of Schedule D on a profit arising from the sale of the shares.  The problem was that the taxpayers in that case were life assurance companies; and although one of the appellants was as a matter of principle unquestionably “chargeable” to tax under Case I of Schedule D, in fact the invariable practice had been for such companies to be charged on a quite different basis (known as the investment income minus expenses – or “I-E” basis).
32.	In the Chancery Division Sir Richard Scott V-C upheld the decision of the Special Commissioners.  In doing so he cited (page 482e) Sir John Vinelott’s description of the interpretative process involved (and which is set out in full above).  At page 484j Sir Richard Scott added this –
“W T Ramsay Limited –v- IRC [1981] STC 174, [1982] AC 300 makes clear that a literal construction of a taxing Act is not necessarily the correct one.  The House of Lords in Ramsay was considering artificial tax avoidance schemes designed to make use of taxing provisions for purposes never intended by Parliament.  The case signalled an end to some of the excesses that a literal approach to construction had appeared to invite.  The warning against a literal construction that would permit the use of a taxing provision for a purpose never intended or contemplated by Parliament was directed at taxpayers, or their tax advisers, but must, in my judgment, be heeded also by the Revenue.  The assessments in the present case have represented, in my view, an attempt to use section 95 for a purpose never intended or contemplated by Parliament.  Such an attempt is no more acceptable from the Revenue than it would be from a taxpayer.”
33.	Both Mr Reader and Mr Death sent me written submissions on these cases (and also on the Inco Europe to which I shall refer in a moment).
34.	Mr Reader argues that because the effect of the literal language is unreasonable and discriminatory it is open to me and the Courts to import a restriction to the wording of section 167(2) so as to exclude from the calculation those costs and benefits which would generally be disregarded under section 157(3).
35.	The difficulty with this, and an insuperable one in my opinion, is that this is precisely the opposite of what the words in section 167(2) provide.  Applying the test which Sir John Vinelott referred to in the key sentence in the passage cited above – can the legislation be read in a way which produces a coherent and reasonable result? – the answer in my view has to be “No”.  It simply cannot be read in that way.
36.	Mr Death in his written submissions suggested that the legislation was drafted in this way to cover the case where the credit card payments for petrol etc. would have exceeded the fixed cash equivalent for car use or petrol under sections 157 and 158.  I doubt whether this is a satisfactory explanation, since a moment’s thought would have led the draftsman to insert a provision which would have the effect of taking into account the higher of credit card payments or the scale charge for car/petrol, and excluding the lower of the two figures.  Anyway, I have concluded that the approach taken by the Courts in Chevron and Prudential –v- Bibby does not allow me to ignore the explicit requirement in section 167(2) that sub-section 157(3) has to be ignored in determining whether the £8,500 threshold is crossed.
37.	I also asked the parties to consider the case of Inco Europe Limited –v- First Choice Distribution [2000] 1 WLR 586.  That case dealt with the question whether there was a right of appeal from a decision of the High Court under section 9 of the Arbitration Act 1996.  The facts and nature of that dispute are not of any significance here.  What is significant, however, is that the House of Lords made it clear that there can be cases where it is permissible to read words into legislation or to omit words or substitute other words.  This was expressed by Lord Nicholls at page 592, as follows –
“I freely acknowledge that this interpretation of section 18(1)(g) involves reading words into the paragraph.  It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language.  The court must be able to correct obvious drafting errors.  In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words.  Some notable instances are given in Professor Sir Rupert Cross’ admirable opuscule, Statutory Interpretation (3rd edition, 1995) pages 93-105.  He comments, page 103:
‘In omitting or inserting words the Judge is not really engaged in a hypothetical reconstruction of the intentions of the drafter or the legislature, but is simply making as much sense as he can of the text of the statutory provision read in its appropriate context and within the limits of the judicial role.’
This power is confined to plain cases of drafting mistakes.  The courts are ever mindful that their constitutional role in this field is interpretative.  They must abstain from any course which might have the appearance of judicial legislation.  A statute is expressed in language approved and enacted by the legislature.  So the courts exercise considerable caution before adding or omitting or substituting words.  Before interpreting a statute in this way the court must be abundantly sure of three matters: (i) the intended purpose of the statute or provision in question; (ii) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (iii) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed.  Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation (see per Lord Diplock in Jones –v- Wrotham Park Settled Estates [1979] AC 74 at 105-106).  In the present case these three conditions are fulfilled.
Sometimes, even when these conditions are met, the court may find itself inhibited from interpreting the statutory provision in accordance with what it is satisfied was the underlying intention of Parliament.  The alteration in language may be too far-reaching.  In Western Bank Limited –v- Schindler [1977] Ch 1 at 18 Scarman LJ observed that the insertion must not be too big, or too much at variance with the language used by the legislature.  Or the subject matter may call for a strict interpretation of the statutory language, as in penal legislation.  None of these considerations apply in the present case.  Here the court is able to give effect to a construction of the statute which accords with the intention of the legislature.” [my underlining].
The other four of their Lordships in the House of Lords expressly agreed with the reasoning of Lord Nicholls.
38.	I do not feel that the present case is one where I can add, omit or substitute words in interpreting sub-section 167(2).  The passages which I have underlined in Lord Nicholls’ speech in Inco Europe preclude that course.  I would have to be “abundantly sure” that the intended purpose of that sub-section is to leave out of account one or other of (a) the amounts paid by means of the employer’s credit card and (b) the cash equivalent of the fuel; and, if so, which of them.  Although in my judgment that would obviously have been a sensible provision, the simple fact is that sub-section 167(2) says the opposite.  In summary, therefore, my conclusion is that I do not have the power in interpreting section 167(2) to, in effect, rewrite it in a way that is directly contrary to its own terms so as to achieve a sensible and fair result.
Parliamentary material (Hansard)
39.	I also invited the parties to consider whether there was any Parliamentary material which may be admissible under the well known principles set out by the House of Lords in Pepper –v- Hart [1992] STC 898.  Mr Reader and Mr Death sent me written observations on this.  It is sufficient to note that nothing was said in any of the various debates which directly addressed the issue which arises in the present case under what is now section 167(2).
Conclusion and result
40.	For the reasons set out above I am unable to see any way in which the language of section 167(2) can be deflected from its course, even though that course leads to the unfair and unjust result that both the actual cost of the petrol purchased by means of her employer’s credit card and the cash equivalent of the petrol as a car fuel benefit-in-kind have to be aggregated in determining whether she crosses the £8,500 threshold.  Aggregating them means that she crossed the threshold in each of the years under appeal.
41.	In the result the appeals against the assessments for all three years fail and I have to dismiss them.

GRAHAM AARONSON QC

SPECIAL COMMISSIONER

SC  3126/02