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Hartland v Diggines (H M Inspector of Taxes)
Factual and Procedural Background
The Appellant worked as an accountant for Company A. Since 1912, Company A had followed a longstanding practice of paying, out of its own funds, the Income Tax due on every employee’s salary. For the tax year ending 5 April 1919, the Appellant’s cash salary was £500; Company A also paid £80 5s. to discharge the Income Tax on that salary.
An assessment under Schedule E treated both the £500 salary and the £80 5s. tax payment as the Appellant’s income. The Appellant appealed to the City of London Commissioners of Income Tax, who confirmed the assessment. He then required a case to be stated for the High Court. Judge Rowlatt of the King’s Bench Division dismissed the appeal. The Court of Appeal (Master of the Rolls and two Lords Justice) affirmed, and the House of Lords unanimously upheld those decisions.
Legal Issues Presented
- Whether, in the absence of any contractual obligation, a sum paid by an employer to meet an employee’s Income Tax liability constitutes an “emolument” or “profit” arising from the office and is therefore assessable to the employee under Schedule E of the Income Tax Act 1842.
- If so, whether the employee may nevertheless deduct that sum under the first Rule of Schedule E on the ground that the duty was “really and bona fide paid and borne” by the party to be charged.
Arguments of the Parties
Appellant's Arguments
- The tax payment was made on behalf of Company A in respect of the office itself, not on behalf of the individual employee.
- Because no agreement existed, the payment was voluntary, not “money or money’s worth,” and therefore not part of the Appellant’s income.
- Even if the sum were income, it should be deducted under the wording of Section 146, Schedule E of the Income Tax Act 1842 (“after deducting the amount of duties … really and bona fide paid and borne by the party to be charged”).
Respondent's Arguments
- The employer’s payment relieved the Appellant of a personal liability and thereby conferred a financial benefit amounting to income.
- Such benefit accrued solely by virtue of the Appellant’s employment and is therefore chargeable under Schedule E, irrespective of whether the payment was voluntary.
- The statutory deduction relied upon applies only where the taxpayer has personally borne the duty, which was not the case here.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Tennant v. Smith | Non-cash benefits may constitute taxable “money’s worth.” | Distinguished but cited by Judge Rowlatt to show that benefits in kind can be taxable income. |
| Scott v. North British Railway Co. | Employer-paid tax, where salary is stipulated “free of tax,” is part of the employee’s emoluments. | Used at every judicial level as close authority; House of Lords confirmed the principle applies even without a contractual “free of tax” clause. |
| Attorney-General v. Ashton Gas Co. | Payments made “free of tax” must be grossed-up when computing income. | Court of Appeal relied on this reasoning to treat tax payment plus salary as a single receipt (x + y). |
| Sir Marcus Samuel v. Commissioners of Inland Revenue | Shareholder's income includes tax paid by the company on tax-free dividends. | Cited in the Court of Appeal to illustrate the “grossing-up” calculation. |
| Blakiston v. Cooper | Voluntary offerings can be “profits” of an office. | Authorities used it to reject the contention that voluntariness removes taxability. |
| Herbert v. McQuade | Voluntary payments linked to office are taxable perquisites. | Reinforced proposition that absence of contractual entitlement is irrelevant. |
| Samuel v. Commissioners of Inland Revenue | Definition of “profits” and “emoluments” for super-tax purposes. | House of Lords referred to show breadth of taxable emoluments. |
Court's Reasoning and Analysis
High Court (Judge Rowlatt): The £80 5s. was “money’s worth,” indistinguishable in substance from the benefit examined in Scott v. North British Railway Co. Because the payment arose solely from the Appellant’s employment, it was an emolument taxable under Schedule E. The lack of contractual obligation did not alter that result.
Court of Appeal: The Master of the Rolls emphasised that Schedule E covers “profits whatsoever” and “perquisites.” Drawing on Ashton Gas and Sir Marcus Samuel, the court described the benefit as salary (x) plus immunity from tax (y). Voluntary payments linked to office are taxable (Blakiston v. Cooper). Accordingly, the tax payment had to be “grossed-up” and added to the Appellant’s assessable income. The court also noted practical concerns about accurate computation but held the principle clear.
House of Lords: Viscount Cave L.C. held that continuous, annual tax payments constituted “money’s worth” and fell within “profits, perquisites or emoluments” under the 1842 Act. Blakiston demonstrated that voluntariness is immaterial. Following Scott, the Lords concluded that the payment formed part of the employee’s remuneration and was correctly assessed. All Law Lords concurred.
Holding and Implications
Holding: The assessment was UPHELD; the employer-paid Income Tax is taxable income of the employee under Schedule E.
Implications: The decision affirms that any amount paid by an employer to discharge an employee’s Income Tax liability—whether or not contractually required—constitutes a taxable emolument. Employers continuing such practices must anticipate corresponding gross-up of employees’ Schedule E assessments; employees cannot invoke voluntariness to exclude the benefit. No new doctrine was fashioned, but the ruling consolidates and extends existing authorities on “grossing-up” for tax purposes.
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