LORD DENNING M. R. - Mr. Bryan holds a most important position with Josiah Wedgwood Ltd., the great pottery firm. He used to be the President of their subsidiary in the United States; but in 1962 the company brought him back to England to be their managing director. He would have preferred himself to live in London. But the company insisted on his occupying a suitable house in North Staffordshire, where he could entertain customers. The company spent a great deal of money in acquiring and equipping a house which is known as Parkfields, Tittensor, Stoke-on-Trent. It was a very large house, much bigger than Mr. Bryan would need for himself and his family. But the company regarded it as of paramount importance that visitors from overseas should be entertained in the home of its senior executive. So they provided the house and paid all the expenses of it. The question is whether those expenses are to be regarded as part of his income so that he is liable for tax on it.
The law is contained in sections 160 and 161 of the Income Tax Act, 1952. Those sections deal with 'expenses allowance' for directors, and also 'benefits in kind' which the company provides for them. If a director is paid money as 'expenses allowance,' it is to be regarded as director part of his income. If he is allowed 'benefits in kind.' such as a flat which is paid for by the company, the expenses incurred by the company are like wise to be regarded as his income. but he is allowed to deduct so much of it as is expended wholly necessarily and exclusively in performing his duties (paragraph 7 of Schedule 9).
The Crown have assessed Mr. Bryan to tax on the footing that all the actual expenses incurred by the company on Parkfield should be chargeable their view, he should be allowed no deduction from those expenses. The case, they say, does not come within paragraph 7 of Schedule 9.
Mr. Bryan submits that he should not be charged with the whole of the expenses, but that they should be apportioned. He relies on section 161 (6) which says that :
'Any reference in this section to expense to expense incurred in or in connection with may matter includes a reference to a proper proportion of any expenses incurred partly in or in connection with that matter.'
The Commissioners held in Mr. Bryans favour on section 161(6). They found as a fact that there was a genuine business use of the house, and that Mr. Bryans personal occupation of it was rusticated in that he was not free to discriminate as to his guests. They allowed one quarter of the total expenses for business purposes. The allowed one quarter of the total expenses for business purposes. The Crown appealed to the judge (Pennycuick J.), who dismissed the appeal. The Crown now appeals to this court. In this court Mr. Rees, who appeared for Mr. Bryan, supported the finding of apportionment, but alternatively claimed a like deduction under paragraph 7 of Schedule 9.
Mr. Phillips for the Crown submits that the companys expenses should all be charged against the director : and that they should only be apportioned when the benefit of the company is severable from the benefit to the director. He said that if one room of the house was used exclusively for the companys business, as for instance, it was used solely as the companys efface, there could be an apportionment. Likewise, if there was a bedroom set aside exclusively for the companys guests, there could be an apportionment. Similarly, if a particular room were used by two directors, each in alternate weeks, there would have to be an apportionment of the expense between each. But Mr. Phillips argued that if the benefit to the company was not severable from the benefit to the director, so that they both benefited jointly, there could be no apportionment.
This argument did not stand up to discussion. We put to Mr. Phillips this instance : suppose Mr. Bryan gave a large dinner party at which half the guests were the companys customers and half his personal friends : and the company paid the cost. Would Mr. Bryan be charged with the whole expense as if it was his own income, and be allowed non deduction? Mr. Phillips conceded that in such a case there would have to be an apportionment. Yet in that case the expense of the food and wine, the cook staff, would be for the benefit of the director jointly with the company. I see no difference between entertaining a large party to dinner, and providing a large house for the director to receive visitors. It is provided for the joint use of the company and the director. It would not be fair or just that the director should be charged with the whole expense as if it were his own income. There should be an apportionment.
We were referred to three cases. One was McKie v. Warner. Mr. Warner was an export sales supervisor. The company required him to live in London to carry out his duties. The company provided a flat for him where he entertained foreign buyers, and a bedroom was available for them. It cost the company 350 Pounds a year. Plowman J. held that he was chargeable with the 350 Pounds as if it were his income : and that he was not entitled to any reduction. All I need say about that case is that no point was raised about an apportionment under section 161(6). If it had been, the decision might well have been different. Another case was Butter v. Bennett, but that added little. The remaining case was Rendell v. Went. Mr. Rendell was a director of a company. He was driving the companys car on the companys business when the car left the road and killed a pedestrian. He was charged with causing death by dangerous driving. If he had paid for his own defence, he would have paid only 60 Pounds. But the company instructed the best lawyers at great expense and paid 641 Pounds for his defence. The House of Lords held that he was chargeable with the whole 641 Pounds as if it were part of his remuneration, with no deduction, Lord Radcliffe said at page 659 :
'This is a case in which the money bought nothing except the appellants defence. No part of it was spent on something which did not benefit him. There is, therefore, no ground for resorting to the apportionment permitted by section 161(6), because apportionment only comes into play where of a total sum spent part can be identified as having been spent on something that was not a benefit or facility to the director concerned.'
In that case every part of the 641 Pounds was spent for the directors benefit. But in the cases which I have put - of entertainment of the companys guests to dinner, or accommodating them for the night, or providing a large house - some part of the expense is for the companys benefit, and not for the directors benefit. It may not be a severable part, but it is undoubtedly some part : and there should be an apportionment.
I find myself, therefore, in agreement with Pennycuick J., who said at page 360 :
'It would be quite unjust where a director living in his companys house is obliged to devote a substantial part of its accommodation and facilities to the company and its invites, that he should be saddled with the tax on the entire income value of the house and facilities.'
There was some discussion in the court below as to the method of apportionment, but it was not canvassed before us.
I ought perhaps to mention three instances taken by Mr. Phillips. The first was when a director was paid 20,000 Pounds gross salary out of which he was expected to live in such a house as this and entertain the companys guests. The second when he was paid 15,000 Pounds and in addition paid 5,000 Pounds in cash as an expenses allowances out of which he was expected to provide the house and entertain. The third was when he was paid 15,000 Pounds salary and the company paid the expenses amounting to 5,000 Pounds. Mr. Phillips said that all those three cases should give the same result : and the result should be, he said, that his total remuneration should be regarded as 20,000 Pounds, without any deduction. Mr. Rees was not dismayed by these instances. He said that in the third instance there should be an apportionment : and that first two instances, the directors should be allowed an equivalent deduction under paragraph 7 of Schedule 9. I think there is something to be said for this view. Paragraph 7 of Schedule 9 is not construed so strictly now as it used to be, see Pook v. Owen. But it is unnecessary to rule on it today. I am content to say that in the third instance there is jurisdiction to apportion so as to meet the justice of the case : and there should be apportionment.
I agree with the judge and would dismiss this appeal.
SACHS L.J. - The relevant part of section 161(1) of the Act of 1952 relates to expenses incurred by a company
'in.... the provision, for any of its directors.... of living or other accommodation, of entertainment, of domestic or other services or of other benefits or facilities'.
As regard accommodation and entertainment, that, of course, clearly must mean accommodation or entertainment for the benefit of the relevant director. Section (6) reads :
'Any reference in this section to expense incurred in or in connection with any matter includes a reference to a proper proportion of any expense incurred partly in or in connection with that matter.'
The present case concerns accommodation provided by a renowned company, Josiah Wedgwood Ltd., whose products go all over the world and who have since the Second World War moved their works premises to a relatively rural ares in North Staffordshire. The taxpayer, Mr. Bryan, was at the material period a full-time director bound by the express terms of his service contract to 'observe all such directions and restrictions as the board of directors of the company may lawfully and reasonably impose upon him.' In fact, the board insisted on his occupying - contrary, as it happened, to his own wishes - heat they regarded as a suitable house not far from the works. They themselves looked for it, found it, purchased it and modernised its accommodation so as to satisfy the boards minimum requirements for entertaining customers.
Amongst the further facts accepted in the case one finds first paragraph 4(2) : 'that the importance of entertaining visitors was paramount in the case of the company, more than 60 per cent. of whose production is exported.' (There was no suggestion that there was any other place in the vicinity of the weeks that served as a guest house for the company). Then paragraph 4(4) : 'that it was essential to the company that they should be entertained in the home of its senior executive.' Here I pause to note that it is well known in the commercial worked that distinguished in the homes rather than hotels.
Next follow facts as to the floor area of the house provided by the company and how it exceeded the area of the sort of house the director would otherwise have occupied by a very large margin - not less than about 75 per cent. on the figures as I read them. Finally incomes to paragraph required by the company in the kind of smaller modern house which he would have purchased purely for the occupation of himself and his family.'
The Crown has throughout contended that on such facts the taxpayer should be charged in full with the relevant expenses, and then, in effect, be left to try and re-claim some of that charge by virtue of the well-know - one might almost say notorious applicable to Case E as embodies in Schedule 9, paragraph 7. It is, of course, plain that on the Crowns contention, concessions apart, he would have got nothing back under those provisions in respect of, for instance, the annual value of the premises as brought into account or the rates or the cleaning services, or for insurance. So he would be left in the main to bear the full charge of this expensive accommodation. If the Crowns contention is right - and upon that I too make no observation - then it would involve real hardship and could indeed involve even greater hardship in other cases. Such hardships are not to be inflicted on the taxpayer unless the legislature has made really clear its intention to impose them.
In the course of argument, however, dispute his general contentions, Mr. Phillips was constrained rightly to make a series of concessions. Firstly, that as regards any business entertainment in the premises, the expenses would have to be apportioned as between the taxpayer and the company. Such entertainment, of course, would not in substance be for the benefit of the taxpayer. Secondly, that if there were any accommodation in the house of which the taxpayer had only a de minimis use, then again apportionment should follow. Next - and I attempt to quote the words - 'even if all the accommodation was of benefit to a director, if you can say part of it was also for the benefit of someone else, there must be an apportionment.' He exemplified this concession by the instance of such a house being occupied by two directors each having their own bedrooms, but sharing the other living accommodation.
Why then should there should there be no apportionment in this case? The submission put forward by the Crown was : because there was no concurrent use by the company. That submission I am unable to accept.
The true effect of the findings in the case seem to be this : the company was in essence providing for its own benefit an entertainment base in the shape of a directors home, and that from its point of view was in truth the main benefit derived from the course it took. Any benefit conferred on the director by the provision of a home was at highest a concurrent benefit; indeed - at any rate from the companys point of view - it was subsidiary to the benefit it gained for itself. It was not quite the case as Mr. Rees put it of the normal type guest house where directors come only from time to time - it was more in the nature of a base as has just been stated. It seems to me at least arguable that at best from the Crowns point of view it is a case where, to quote from Pennycuick J.s words - 'a company establishes living accommodation or facilities for common enjoyment by a director and others, whether the company itself or third parties.' Thus for my part, I, like the judge, am disposed to doubt whether (quite part from sub-section (6)) the Crown ever got to the stage of establishing that the provision of the whole house was for the benefit of the taxpayer; and if it did not, then the Crown would already on that ground have to assent to apportionment.
I am, however, quite content to rest my decision on the ground that subsection (6) in any event concludes the apportionment point against that Crown. Here again I would echo the words of the judge where he said, at page 360 :
'It does not seem to me that subsection (6) admits of any other construction. This view appears to me to coincide not only with the terms of the subsection but with reason and fairness. It would be quit unjust where a director living in his companys house is obliged to devote a substantial part of its accommodation and facilities to the company and its invitees, he should be saddled with tax on the entire income value of the house and facilities.'
As regards Rendell v. Went the facts are to my mind so different from those of the instant case that it is not easy to extract relevant guidance from it. It is, however, to be noted that Lord Reid at page 657 does say : 'I could understand a case being made for apportionment if the expenditure had been made for two objects, only one of which was of benefit to the director.' This seems to me to be such a case. I, accordingly, agree that the Crowns appeal be dismissed.
Turning to the particular apportionment, that as my Lord has mentioned, is no longer the subject of appeal. It is perhaps however as well to express my agreement that such an apportionment must, as Pennycuick J. stated, necessarily be on a rough and ready basis. One must, of course, be on strict guard to avoid abuses such as by provision of benefits merely in reality adding to the remuneration of a director; but to my mind no precise formula can as a rule be applied. I would, however, wish to reserve for some future occasion consideration of whether the substantial aim of any basis should not normally be quite simple : by objective tests value of the accommodation and services forced on that employee by the employers for their own purposes and the annual value of that which such an employee would otherwise normally have been expected to provide for himself.
PHILLIMORE L.J. - I also agree. After reciting the various findings of fact quoted by my Lords, Sachs L. J., the commissioners concluded by saying that they
'found as a fact that there was genuine business use of the house and that Mr. Bryans personal occupation of it was restricted in that he was not free to discriminate as to his guests';
and they considered that 'in principle the case for apportionment under section 161 (6) had been made out.' Now, as I understand it, what they were saying was this : true, the company provided Mr. Byran with a home, but it was a home which he had to run in a manner which suited their business. In fact it was so conducted as to entertain those whom the company wanted to be entertained. Now, really on the face of that finding it would be grossly unfair if all the expenditure which the company made towards the provision of this home should be added to Mr. Bryans salary so that he would be taxed upon it and the benefit to the company were entirely disregarded for tax purposes. Accordingly I confess that I have not found the argument for the Crown in this particular case very attractive. It seems to me that in fairness this was a benefit both to Mr. Bryan, so far as he got a home, and to the company in so far as this entertainment was conducted for their purposes. Originally, as I understood him, Mr. Phillips, on behalf of the Crown, said : there is no case for apportionment here, The company has provided Mr. Bryan with a home. There is nothing here to suggest that the company, for example, has the use of any particular room. Mr. Bryan also had the benefit of the entertainment which he was able to conduct, and accordingly there is no argument here for any apportionment. Later, however, as a result of the admissions which my Lord, Sachs L. J., recited, the argument for the Crown became, as I think, untenable. If it is right that you apportion where you have got a concurrent joint benefit, as in the case of two directors sharing a flat provided by the company, then you must also apportion the flat or house used both by the director and by the company, and that is the reality of the position in this case.
Accordingly I agree that this appeal should be dismissed.
Appeal dismissed with costs.
Leave to appeal on condition that Crown pay costs of both sides in House of Lords.
Solicitors : Solicitor of Inland Revenue; Gouldens for Knight & Sons, Newcastle-under-Lyme.