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The first point to note is that Schedule E as it appeared in Peel's Income Tax Act of 1842 substantially repeated the provisions of the 1806 Act. The code was drafted in the social and economic context of the reign of George III. Tax in 1842 was to be charged under Schedule E at sevenpence in the pound, "upon every public office or employment of profit, and upon every annuity, pension or stipend payable by Her Majesty or out of the public revenue of the United Kingdom." These were the charging words in the Schedule, not at that time a schedule in the modern sense of something tacked on to the Act, but one of the five "several schedules contained in this Act, and marked respectively (A), (B), (C), (D),and(E)." Section 146 of the Act then set out the rules under which "the duties hereby granted contained in the Schedule marked E" were to be assessed and charged. There were 10 rules. The rules make clear that what was to be taxed was the pay attaching to a particular office or employment, not the office holder or employee. Pay was described as "salaries, fees, wages, perquisites or profits whatsoever accruing by reason of" the office or employment. So far as concerned officers in the public service, there were to be commissioners in each department who would make the assessments and the paymaster or agent paying the salary was to detain and stop the tax out of any money payable. No provision was made in the rules for deducting any "necessary" expenses. There was, however, provision for deducting duties or other sums payable or chargeable on the salary by virtue of any Act of Parliament; and provision was also made to the effect that if the principal in an office, out of his 26 Parliament's Part salary, paid a deputy or clerk or other employee, then the principal could deduct and retain tax at the appropriate rate and the deputy, clerk or employee was to allow the deduction, precisely the same rule as applied to payments of mortgage interest or other annual payments. Also to be deducted from the salary were "all official deductions and payments made upon the receipt of the salaries...

or in passing the accounts" belonging to the office.

We may suppose, therefore, that when in Trollope's autobiographical novel, The Three Clerks, Alaric Tudor accompanied the faintly ridiculous Mr. Neverbend to inspect the Wheal Mary Jane mine in Cornwall and, having reached Plymouth by train from Paddington, insisted on hiring a carriage with a pair of horses to get them to the Bedford Hotel at Tavistock, Mr. Neverbend meanwhile urging the merits and economy of using public transport, the whole matter of obtaining reimbursement for expenses incurred was mere routine. Had Tudor held an office which regularly involved journeys of inspection, as did Trollope's own job in the Post Office, it may be that he would have been expected to pay all his own expenses or that his expenses would have been reimbursed or it may be that any expenses met out of the emoluments would have been passed when the office holder's accounts were presented and the Commissioners, themselves officers in the same department, would have made allowances in the income tax assessments. What may reasonably be assumed is that there was a pattern in 1806, a social and administrative pattern, which would have remained substantially unaltered in 1842. The concept of a public office with emoluments, perhaps in the form of fees, or a stipend attached, was a familiar one.

The office holder would be expected to employ his own deputy and clerks. The paymaster would pay the salary and the office holder would pay his deputy and clerks, deducting from their pay and himself pocketing, the sevenpence in the pound which would have been deducted from his salary, if the office was one where the remuneration all came in as fees, then no doubt the office holder would present his accounts each year to the department in which he served being a record of his receipts and expenses.

There must at some quite late stage have beeiL some problem about those office holders who were required to provide themselves with a horse for getting about in the course of their duties. In 1853 —and be it noted not before 1853—some familiar words appeared in section 51 of that year's Act: "In assessing the duty chargeable under Schedule E of this Act in respect of any public office or employment, where the person exercising the same is necessarily Parliament's Part 27 obliged to incur and defray out of the salary, fees or emoluments of such office or employment the expenses of travelling in the performance of the duties thereof, or of keeping and maintaining a horse to enable him to perform the same, or otherwise to lay out and expend money wholly, exclusively and necessarily in the performance of the duties of his office or employment, it shall be lawful to deduct from the amount of the said salary, fees and emoluments to be assessed under this Act the amount of all such expenses and disbursements necessarily incurred and defrayed in manner aforesaid."

The horse is still there. One hundred and twenty eight years after his late arrival in the tax code he is present, alive and kicking.6 In 1806, and again in 1842, the list of public offices or employments of ^profit of a public nature to which these rules applied would not have been a long one. The third rule of the 10 rules set out in the Act, in fact, lists the offices which it was contemplated would be covered by Schedule E. That and the other nine rules provided a comprehensive and, there is every reason to suppose, workable and satisfactory code for dealing with tax on public offices including any questions of expenses which under the conditions then prevailing were likely to arise. Presumably there had been some change in the general pattern by 1853 and the rule as to travelling expenses was tacked on to the existing code to clear up a possible doubt and difficulty.

What happened then? As consolidation succeeded consolidation and the 1974 Act amended the last consolidated Act of 1970 the original code got hacked away and all that was left was the 1853 accretion to the 1806/1842 Schedule E code, deduction of necessary expenses; the faithful horse goes plodding on, all alone. The dog cart and the stable have long since been removed. Nor is that all. In October 1919 there came before the Special Commissioners the case of Great Western Railway Company v. Bater (Surveyor of Taxes).1 The question was whether a clerk in the G.W.R.'s Divisional Superintendent's office at Swindon, who was paid all of £130 a year, was taxable under Schedule E or Schedule D. If he held a public office or employment of profit of a public nature, he was taxable under Schedule E; if he merely had an employment, not of a public nature, he was taxable under Schedule D. The practical significance of the alternatives was that the basis of

6 s. 189 ICTA 1970.

[1922] 2 A.C. 1, 8 Tax Cas. 231.28 Parliament's Part

liability at that time was a three year average for Schedule D, whereas if the taxpayer was taxable under Schedule E, then by virtue of provisions which had been in force since 1860 the G.W.R.

would be responsible for the tax, would pay the employee under deduction of tax on a basis which anticipated the PA YE system by some 80 years and would account for the tax to the Revenue.

(Incidentally, under the 1860 provisions all assessments on railway companies in respect of their employees (if taxable under Schedule

E) were to be made by the Special Commissioners). The question what expenses could be deducted did not arise and was not considered. The G.W.R. appealed against the Special Commissioners' decision that the clerk was assessable under Schedule E. Mr. Justice Rowlatt heard the appeal in June 1920. He looked at the rules in the 1842 Act regarding assessments made under Schedule E and said that what those who framed the rules meant, when they spoke of an office or employment, was an office or employment which was a subsisting, permanent, substantive position, which had an existence independent from the person who filled it, which went on and was filled in succession by successive holders. In the social and administrative context of 1806 and 1842 that this is what those who framed the Acts intended seems an inescapable conclusion. It makes sense, too, of the whole system regarding expenses to be deducted in computing liability. However, Mr. Justice Rowlatt, though doubting whether the clerk held a public office or employment, reckoned that he was bound by authority in the matter and that the railway clerk was assessable under Schedule E as railway clerks had in practice been assessed for the past 80 years. The Court of Appeal threw little light on the problem. They avoided any bold or definitive conclusion by saying that the decision of the appellate Special Commissioners was a decision of fact with which they could not interfere. However, Lord Justice Scrutton made a number of relevant comments. "I agree," he said, "that our decision" — that the clerk held a public office or employment—"is not very satisfactory even to ourselves. That results from the fact that the Income Tax Acts are being worked under a system of considerable antiquity which in many respects has not been amended by Parliament. All employees whose income reaches a certain amount, which has varied from time to time, are taxable either under Schedule E or under Schedule D. Whether they come under one Schedule or the other has certain consequences... If they come under Schedule E, they are taxed on the income of the year of assessment and if they come under Schedule D, they are taxed on the average of the preceding Parliament's Part 29 three years' income, if there is such an average; and that if they come under Schedule D, they are assessed directly and must fight out their battles with the Income Tax people by themselves, but if they come under Schedule E, they are assessed through the employer who has to pay to the Income Tax authorities and then deduct from his employee. Naturally under those circumstances it may make a difference to a man whether he is put under Schedule D or whether he is put under Schedule E." When the case came before the House of Lords in February 1922 their Lordships by four to one, reversed the decisions below, to a limited and, it may be, controversial degree endorsed Mr. Justice Rowlatt's analysis to the effect that continuity was the key to what constituted an office, and held that the railway clerk did not hold a public office or employment.

This result produced a sharp reaction. All other offices and employments were promptly transferred from Schedule D to Schedule E to join the public offices and employments already there to be found. Introducing the measure in Parliament, the Chancellor

of the Exchequer, Sir R. Home, had this to say about the transfer8:

"But I should like the Committee to understand the considerations which moved us upon this matter. The decision of the House of Lords"—in G.W.R. v. Bater—"was, undoubtedly, a surprise, not merely to the Treasury officials and the Government but, I think, to the great bulk of people who knew anything about Income Tax law.

The result was that it threw into confusion the whole basis of employees in this country, and it was hinted in that judgment of the House of Lords that something was necessary to be done, and it was obvious to the people who had the administration of the law in their hands that it was necessary to put the whole matter on a proper foundation. We decided accordingly not to take advantage of the judgment of the House of Lords, because it would have been an advantage to us at the present time, as a mere matter of money"— salaries and wages were dropping and a three year average would give a higher yield than the actual year basis—"but to bring in at once legislation which would have the effect of putting all employees of the country of the character described on the basis of Schedule E instead of Schedule D so that there would be no further difficulty."

Oddly, the Chancellor made no reference to the recommendation of the 1919 Royal Commission that this change ought to be made in any event. And need anybody knowing anything about Income Tax law, as opposed to Income Tax practice, really have been surprised?

Hansard June 20, 1922 Col. 1188.

30 Parliament's Part In 1806 railway companies did not exist, and, if they had existed, it seems inherently unlikely that their clerks would have been taxpayers.

The more astonishing feature, however, of the switch of all offices and employments to Schedule E was that now section 51 of the 1853 Act, the faithful horse, must bear the whole burden of expenses, what may be deducted and what may not. In 1919 and 1922 the point seems to have gone wholly unnoticed. So far as noticed it was probably considered unimportant. The 1955 Royal Commission, the Radcliffe Commission, commented on the rule and the criticism aimed at it.9 "There can have been no part of the income tax code which has been so regularly the subject of unfavourable notice." The report then cites 11 cases where the position regarding expenses was the subject of adverse judicial comment. The Royal Commission made recommendations. The test for deduction of expenses should be differently expressed: "All expenses reasonably incurred for the appropriate performance of the duties of the office or employment." No change in the law has as yet been made on that part of the Royal Commission's recommendations. That, however, is not the burden of my plea: I want sympathy for the horse. How could a provision tacked on to tidy up a doubt arising in the application of a code of rules designed to deal with a limited list of public offices in the early part ofthe nineteenth century be expected to operate adequately, let alone fairly, in relation to offices and employments in the commercial, industrial and social circumstances obtaining^in the latter half ot the twentieth century?

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