David Hardy Glynn v Commissioner Of Inland Revenue

Judgment Date08 March 1988
Subject MatterInland Revenue Appeal
Judgement NumberHCIA5/1987
CourtHigh Court (Hong Kong)
HCIA000005/1987 DAVID HARDY GLYNN v. COMMISSIONER OF INLAND REVENUE

HCIA000005/1987

INLAND REVENUE APPEAL NO. 5 OF 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

David Hardy Glynn Appellant
and
Commissioner of Inland Revenue Respondent
__________

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...

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