Taxing Perks and Interpreting Statutes: Pepper v Hart

CASES Taxing Perks and Interpreting Statutes: Pepper v Hart

David Miers”

Introduction There are two kinds of perks: the licit and the i1liciL1 Licit perquisites can take a variety of forms: the company car, private health care, cheap loans, the use of assets owned by the employer, and subsidised travel and accommodation. They also offer a variety of advantages. From the employee’s perspective, such perks represent (since tax is payable on them) the purchase of benefits which they might otherwise be unable to afford, or afford only at a cost to their disposable income that would require saving elsewhere. From the employer’s perspective, it is often more cost effective to provide a perk than an increase in salary that would, after tax, allow the employee to purchase the perk in the retail market. This is especially so where the employer wants the employee to have the perk, for example the cottage on the estate whose responsibility it is for the employee to maintain,* in order to do the job. Employers can buy in bulk and may, as in the case of fleet purchasing of company cars, be able to exert considerable leverage on motor manufacturers and traders .3

Another significant saving for employers is the provision to their employees of the service which they are in the business of providing; what Nicholls LJ (as he then was) in the Court of Appeal referred to as ‘in-house’ as opposed to ‘external’ benefit^.^ Air and rail travel, and places at public schools and the like, are good examples. Employees can be given free or reduced cost access to a service which the employer has presumably costed on the basis that it is the non-employee user who is paying. A train has to travel from Cardiff to London: the addition of a few non-paying BR employees as passengers does not on the face of it affect the cost to BR of providing that service to the general public. The teachers at a public school - as in Pepper v Hurt,5 which is the focus for this comment - may have the opportunity to place their children there at a cost which is marginal to the school, but is, of course, a considerable saving to them.

Perks have traditionally been used as the means for increasing an employee’s total remuneration (and for distinguishing grades of employee) but without

*Professor of Law, Cardiff Law School. I am grateful to my colleague Philip Wylie, and to Howard Mellett of the Cardiff Business School, for their comments on a draft of this note.

1 The illicit are arranged covertly and unilaterally by the beneficiary and can constitute a significant drain on the victim’s economy; this is certainly true of employee theft in the retailing sector.

2 Verrigan v Brudy [1988] STC 91. 3 This leverage has its downside for taxpayers buying privately, since, in having to pay more for their

cars, they are in effect subsidising these employers. Under the 1993 Budget proposals, the scale rates for company cars were increased by 8 per cent, thus bringing the taxable benefit closer to the cost of providing the car. From 1994/95 the scales will be based on the manufacturer’s published list price (not discounted values), which it is hoped ‘will eliminate a cause of distortions in the new car market,’ allowing private buyers to buy at a fairer price. See [I9931 STI 430, 433. [I9921 2 All ER 824, 82731. [1993] 1 All ER 42.

4 5

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increasing his tax bill by a corresponding amount. But just as there is no such thing as a free lunch (if it can be written off as a legitimate expense, then the lunch is being subsidised by non-lunching taxpayers6), benefits in kind are not just a matter of contractual arrangement, but have a public, and hence a political, dimension. One important question is, how ought such benefits in kind to be treated for tax purposes when in the hands of the employee?

Taxing Fringe Benefits

There are a variety of options. These may essentially be distinguished according to whether the value of the benefit is to be determined as a matter of demand or a matter of supply. As to the former, the value would be what it would cost the taxpayer to buy (either new or second-hand) on the open market. As to the latter, the choice lies between the full and the net or marginal cost of the supply of the benefit. One obvious difficulty with the former is that it is not readily possible to value some perks (eg living accommodation) at their open market value. Tax law distinguishes three groups of fringe benefit. By virtue of ss 141 - 146 of the Income and Corporation Taxes Act 1988 (ICTA), a number of fringe benefits such as living accommodation, travel vouchers and credit cards are taxable benefits to all employees; although there are variations, the basis on which the emolument is valued is the actual cost incurred in their supply. Second, by ss 153-168 of ICTA, all benefits that are provided by reason of their employment to directors and to those until recently called ‘higher paid employee^,'^ are taxed on the basis of the cost of their supply (though what precisely constitutes ‘cost’ in these cases was the point in issue in Pepper v Hart), except notably in the case of company cars, petrol and mobile phones where the level of emolument is specified in annually updated statutory tables. The benefits need not themselves be paid for by the employer, though if they are there is an irrebuttable presumption that they are provided by reason of the taxpayer’s employment.8 These sections catch such benefits as the use of the employer’s assets, company cars and petrol, benefits ancillary to the use of living accommodation, beneficial loan arrangements, scholarship schemes, and shares. The principle is to tax all benefits, other than those that are excluded or are charged elsewhere, that are provided, by reason of the taxpayer’s employment, to the employee or her family. Finally, even if a benefit is not caught by the statutory provisions, it may fall under the common law rule that a benefit that is convertible into money or money’s worth is a taxable emolument according to its second-hand value.9

~ ~ ~~ ~ ~

6 A striking example of the implications of the fact that one taxpayer’s avoidance scheme is another taxpayer’s tax increase can be seen in Moodie v IRC [1993] 2 All ER 49. Here the House adopted the later of two apparently conflicting decisions of its own to hold invalid for tax purposes a self-cancelling avoidance scheme, Lord Templeman remarking (p 55e) that this would restore ‘justice between individual taxpayers and the general body of taxpayers. ’

7 The threshold of the ‘higher paid’ employee is f8,500 (which is to be determined initially by assuming that the taxpayer is a higher paid employee and applying the appropriate statutory rules and without making allowance for any expense deductions). It is the government’s clear intention that all fringe benefits should be brought within the charge to tax irrespective of the taxpayer’s salary; see [1989] STC 336.

8 ICTA, s 168(3) (unless the employer is an individual and the benefits can be shown to have been provided in the normal course of his domestic, personal or family relationships).

9 Tennant v Smith [1892] AC 150, Williams v Rogerson [1961] 1 All ER 358.

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September 19931 Taxing Perks and Interpreting Statutes: Pepper v Hart

Taxing Surplus School Places 1: Average Cost

For many years, schoolmasters at Malvern College, an independent fee-paying school have, like others similarly placed, enjoyed the benefit of being able to educate their sons at the school at a concessionary rate. The fees they paid (20 per cent of the full fee) more than covered the variable costs incurred by the College in providing for their children (laundry, stationery, food), while their presence did not increase its fixed costs (heating, lighting, staff salaries, school maintenance, and so on). Moreover, the acceptance of any of the schoolmasters’ sons did not thereby deprive the College of any full fee-paying pupil. In none of the relevant tax years was the College full to capacity; had the taxpayers’ sons not been accepted, their places would have remained empty.

It was common ground that the education of the taxpayers’ children was a taxable benefit under s 154 of ICTA (s 61 FA 1976).1° This provides that where a person is employed in ‘higher paid’ employment, any services, benefits or facilities of whatsoever nature that are provided for him or his family by reason of his employment are to be treated as emoluments of his employment and chargeable to income tax under Schedule E on an amount ‘equal to whatever is the cash equivalent’ of the benefit. The phrase ‘cash equivalent’ is defined in s 156 (s 63 FA 1976) as being ‘an amount equal to the cost of the benefit’ (less any contribution made by the taxpayer), which in turn means (s 156(2)): ‘the amount of any expense incurred in or in connection with its provision, and . . . includes a proper proportion of any expense relating partly to the benefit and partly to other matters. ’

‘The short issue,’ as Nicholls LJ put it in the Court of Appeal, concerned the computation of that expense.l1 For the Revenue, it was argued that this was a proportion of the total costs of running the school:

average cost - - fixed costs + variable costs total number of pupils

The benefit consisted of the enjoyment of the College’s facilities, and the cost of providing those facilities was the total cost of running the school, whether the pupil using them was paying fees or not. For the taxpayers, it was argued that as the College would be incurring its fixed costs whether their children were or were not accepted, the cost of providing the benefit of its facilities to them was confined to those variable costs that would not otherwise have been incurred if they had not been accepted:

additional variable costs number of concessionary pupils

= marginal cost

The Special Commissioner agreed with the taxpayers. On appeal by the Revenue, Vinelott J held that ‘the cost of providing [the] benefit is to be taken to be expense incurred in or in connection with the facilities afforded and so far as shared with the other boys at the school a rateable proportion of the cost of the facilities

10 The case was decided on the basis of the Finance Act 1976, which was in the substantial consolidation in ICTA 1988. As there is no difference between the applicable provisions, I have opted to use the current section numbers (the repealed sections are indicated in parentheses when first mentioned in the text).

11 [1991] 1 All ER 8278.

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afforded to them all.’12 The Court of Appeal dismissed the taxpayers’ appeal. Giving the court’s judgment, Nicholls W agreed with Vinelott J, holding that the cost to the employer was the average, not the marginal cost:

The benefit enjoyed by the [taxpayers] consisted of the opportunity for their boys to have a place in the school and make use of all the school facilities. Each place at the school cost the school as much as every other place. Thus the expense incurred by the school in providing that benefit for any one member of the staff such as the bursar was a proper proportion of the general running expenses of the school, since those expenses related partly to the benefit provided for the bursar and partly to ‘other matters.’I3

His Lordship was initially troubled by the ‘surplus capacity’ argument; that is, that when Malvern College accepted its schoolmasters’ sons it apparently incurred no expense beyond the additional costs they represented (which were met by the concessionary fees). Asked how much it would cost an airline to provide a spare capacity seat to one of its employees, the taxpayer on the Clapham omnibus would say, ‘nothing.’ The flaw in this response is that it confuses the expense of creating the benefit with what the employer may have lost in allowing the employee free (or discounted) access to it. Suppose that it costs an airline &8,000 to run a scheduled service from A to B. Initially, the airline prohibits its employees from travelling on its planes other than as full fare-paying passengers (for simplicity, ignore discounted prices). The cost of the service will remain constant irrespective of the number of passengers; and even if there are no passengers, the service will have to be maintained if the airline is to keep its route authorisation. Subsequently, the airline permits its employees to travel free. The cost to it of doing so, in the sense of the expense it has incurred, is nil, because the scheduled service still costs &8,000. The ‘cost’ is the lost income that the airline might have derived if its employees had chosen to travel and pay, but lost income is not an expense. l4 ‘The statutory formula is not concerned with what . . . the employer can be said to have lost by providing the benefit. [It is] concerned exclusively with one specific calculation: the amount of expense incurred by the employer in providing the benefit.’I5

Agreeing with Nicholls LJ, Slade LJ nevertheless expressed (as did Vinelott J) some misgivings about the implications of the construction the court reached, in particular where the employer’s business was running at a loss. In such a case, as was conceded by the Crown, it was quite possible for the employee’s taxable benefit to exceed the payment or fee required of the general public for the benefit. Displaying a startling degree of prescience, his Lordship owned that he had ‘an uneasy suspicion that the legislature, in drafting s 63(2), was simply not directing its mind’ to the case where the employer’s surplus capacity was taken by its employees, for if it had, it could specifically have provided for it.16

12 [1990] STC 6, 20. But merely to speak of the costs incurred by Malvern College in providing these facilities does not wholly settle the issue, on what basis are those costs determined? They could be taken from the audited accounts of the College; that is, historical cost. One alternative is current cost; that is, to cost the College’s buildings etc at their current replacement cost, which would generate a higher average cost. A further issue concerns whether VAT should be included where the service being provided to the employee would normally carry VAT when supplied to the public.

13 [1991] 2 All ER 824, 830a-b. 14 The example is based on a ‘travel news’ item in The Times, 22 April 1993, p 19. I am grateful to my

colleague Philip Wylie for drawing it to my attention and for his comments upon it. 15 per Nicholls W, at 829h. 16 At 833f-g.

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Taxing Surplus School Places 2: Marginal Cost

Notwithstanding the unanimous decision of the Court of Appeal, it is quite clear that what the government of the day intended was that the appropriate measure in such cases would be the marginal cost of the benefit. Until 1976 the ‘cash equivalent’ of both ‘external’ and ‘in-house’ benefits (which had not hitherto included free or discounted school places) was the expense incurred in providing thern.I7 But in the Finance Bill 1976, the government proposed that the cash equivalent of in-house benefits would be their market value, that is, the price paid for them by the public. School teachers were not excluded. Clause 54(4) thus threatened a very substantial change in the tax treatment of in-house benefits: for those formerly caught by the Finance (No 2) Act 1975 and its predecessors, the cash equivalent increased from marginal cost to market value, while for schoolmasters such as those at Malvern College, a benefit having a nil tax implication would now be equivalent to the fees paid by non-employee parents. In response to repeated representations, the government withdrew the clause, the Financial Secretary to the Treasury assuring MPs that, in so doing, the Bill would merely restate the existing law, that is, that the cash equivalent would be the cost incurred in the provision of the benefit. Of itself, this assurance would have served only to create the ambiguity that fell to be resolved in Pepper v Hart, but the Secretary also, though without using the exact words, clearly indicated that what he meant by the cost to the employer was the marginal cost. Indeed, Mr Sheldon was specifically asked about the tax position of school teachers. He replied:

The removal of Clause 54(4) will affect the position of a child of one of the teachers at the child’s school, because now the benefit will be assessed on the cost to the employer [and not at market value], which would be very small indeed in this case.I8

It was against the background of s 156’s parliamentary history that the House of Lords reversed the Court of Appeal.Ig Of the seven members of the committee who finally determined the appeal, only Lord Mackay LC and Lord Griffiths accepted the taxpayers’ixgument that the definition in s 154(2) of ICTA 1988 of ‘the cost of a benefit’ meant, in this case, the marginal cost. For the other five, the Revenue would but for the declared intentions of the government in 1976, have won the day. This point is worth emphasising, for in none of the three cases decided by the House immediately subsequent to Pepper v Hart were the parliamentary statements dispositive of the appeal.

The Lord Chancellor thought it crucial that the places occupied by the taxpayers’ sons were surplus and, in the words of the Special Commissioner, wholly at the College’s discretion:

If one regards the benefit in this light I cannot see that the cost incurred in, or in connection with, the provision of the benefit can properly be held to include the cost incurred, in any event, in providing education to fee-paying pupils at the school who were there as a right in return for the fees paid in respect of them . . . looking at the matter from the point of view of expense incurred and not from the point of view of loss to the employer, no expense could be regarded as having been incurred as a result of the decision of the authorities of the college to provide this particular benefit to the taxpayer.*O

17 The parliamentary history is set out by Lord Browne-Wilkinson at 56-60. 18 HC Official Report Standing Committee E (Finance Bill), 22 June 1976, col 1098. 19 The exclusionary rule does not preclude reference to the parliamentary history of the legislation by

way of context since this does not involve an attempt to use that history to reach an interpretation of a word or phrase.

20 At 46e.


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With respect, the argument that the allocation of places to the taxpayers’ sons was discretionary does not meet the point. All places at the College are discretionary in the sense that, apart from the economic imperative of taking on sufficient fee- paying pupils to meet its costs, no applicant has any right to a place. But even allowing for the contractual rights the fee-paying pupils enjoy upon acceptance, the designation of the surplus places allocated to its employees’ sons as discretionary does not resolve the question, how is the statutory test to be interpreted: expense to the employer in providing any place, or the expense incurred in providing this place? Further, as Lord Browne-Wilkinson noted, access to Hunsurd shows quite clearly that the distinction Lord Mackay sought to draw was not at any stage reflected in the debates. ‘Concessionary travel for railway men is not discretionary nor is it dependent on there being surplus seats on any train. Similarly, in many cases the education of teachers’ children at concessionary rates is neither discretionary nor dependent on there being surplus capacity.

Lord Griffiths, in a minority of one at the conclusion of the first hearing, based his acceptance of the taxpayers’ argument on the absurdity that follows from the average cost interpretation; that is, that in a loss-making or subsidised service, the employee could well be in receipt of a taxable emolument whose cash equivalent is more than its market value. Recall the airline example given earlier. Suppose that the plane when full holds 200 fare-paying passengers. Needing f8,000 to run the service, the average cost of each passenger is f40, while the average fare is ElOO. Suppose hrther that, of its 200 seats, only 25 per cent are taken on a given flight. An employee taking a ‘surplus’ seat on the quarter-full plane thus has, if average cost is the basis, a taxable benefit equivalent to f 160, f60 more than the average fare. Moreover, the employee’s tax liability will necessarily vary according to a factor that has nothing to do with her, namely, how successful her employer is in filling the plane with fare-paying passengers.22 If the decision of the Court of Appeal in Pepper v Hurt had been upheld, the taxpayers’ benefit would have decreased or increased according to whether Malvern College was able, in any one tax year, to attract more (until more teachers needed to be employed) or less pupils.

Nevertheless, as Lord Browne-Wilkinson observed, Lord Griffiths’ view founders on the statutory language, which ‘does not seek to value the benefit to the employee as such, but requires the quantum of the benefit to be fixed by reference to the cost to the employer in providing it.’23 Following the first hearing of the appeal, counsel for the taxpayers (Anthony Lester QC) sought to convince the committee that it would be proper to refer to the official report of parliamentary proceedings in order to resolve the difference of interpretation. This was argued before a committee of seven Law Lords, with the Lord Chancellor, who had not been a member of the committee at the first hearing, as chairman. In the result, Lord Mackay was the sole dissentient from the proposition put by Lord Browne- Wilkinson for the majority:

I therefore reach the conclusion, subject to any question of parliamentary privilege, that the exclusionary rule should be relaxed so as to pennit reference to parliamentary materials

21 At 71g-h. 22 The matter is of course much more complex, if only because, as the news item referred to above

indicates, there is a wide variety of discounted fares which mean that even with 60 per cent load, the plane will still run at a loss, while the employee’s taxable emolument would be f66.66 (the average). But the combination of discounted fares that is typically available makes the notion of ‘average’ fare virtually meaningless.

23 At 72j-73a.



where: (a) legislation is ambiguous or obscure, or leads to an absurdity; (b) the material relied on consists of one or more statements by a minister or other promoter of the Bill together if necessary with such other parliamentary material as is necessary to understand such statements and their effect; (c) the statements relied on are clear.24

Their Lordships agreed that there was no doubt that in this case these tests were met. Section 156 is ambiguous as between the average and the marginal cost interpretations of ‘expense,’ the words relied on are those of the responsible Minister and, while the Financial Secretary did not, in so many words, say that the appropriate measure of ‘expense’ was the marginal rather than the average cost, it was clear from Mr Sheldon’s replies, all of which emphasised that the charge to school teachers (and other beneficiaries of in-house services) would be ‘very small indeed’ or even nil, that he meant marginal cost. As revealed by these ministerial statements, the House preferred the taxpayers’ construction of s 156. In anticipation of a flood of claims for over-assessments, the Revenue published in January 1993 details of how taxpayers may recover the excess tax that they have paid.25 Some estimates place at well over 150,000 the number of employees who will, as an immediate consequence of Pepper v Hurt, be seeking repayments.26

Using Hansard as an Aid to Interpretation

Much has been written about the desirability of a court’s paying attention to what the legislature said were its intentions when it enacted a piece of legislation. Some of the literature addresses the question whether it is possible to know the intentions of a collegiate body27; others have written on the wisdom of attending to them, even where they are capable of being known. As Lord Scarman observed in Davis v Johnson, ‘the cut and thrust of debate’ is ‘not always conducive to a clear and unbiased explanation of the meaning of statutory language.’28 While the objections to rummaging in ‘the ashcans of the legislative process’29 for evidence of legislative intent have continued to focus on the reliability, relevance and accessibility of what is reported in H ~ n s u r d ~ ~ (as the Law Commissions put it over 20 years ago),31 judges have occasionally referred to what was said in debate for the purpose of resolving a doubt about interpretati~n,~~ despite the self-

24

25

26 27

28 29

30

31 32

At p 69. A Practice Direction concerning the submission of extracts from Hunsurd in appeals before the House was made in early 1993; [1993] 1 All ER 573. [1993] STI 196. This also indicates what, as a general guide, the Revenue will regard as a marginal cost of an in-house benefit, whether received directly or through vouchers which employees exchange for in-house goods or services. The Times, 22 January 1993. See, for example, W. Twining and D. Miers, How to do Things with Rules (London: Weidenfeld and Nicolson, 3rd ed, 1991) pp 202-211. [1979] AC 272, 350. C. Curtis, It’s Your Law (1954) p 52, quoted in R. Dickerson, ‘Statutory Interpretation in America’ [1984] Stat LR 76, 79. See the debate initiated by Lord Irvine, HL Deb ~01503, cols 278-307 (18 January 1989); D. Miers and A. Page, Legislation (London: Sweet & Maxwell, 2nd ed, 1990) pp 176- 180; and F. Bennion, Stututory Interpretation (London: Butterworths, 1984) pp 514-550. On the point of reliability, the following remarkable proposition appeared in HC Deb Standing Committee F, col233 (8 December 1987): ‘There is a power in the High Court to strike out legislation which is deemed to be frivolous or vexatious.’ A nice thought, but a charitable interpretation is that ‘legislation’ is a misprint for ‘litigation. ’ The Inrepretarion of Sturures (1969) Law Com 21, Scot Law Corn 11. See the cases cited in Bennion, supra p 533; a recent example is R v Acton Justices, ex p McMullen (1991) 92 Cr App R 98.

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imposed rule against its use. By comparison with the literature addressing this question as a matter of theory or of principle, there are relatively few accounts of cases in which recourse to parliamentary proceedings might (or not) have made a difference to the outcome of the case.33 One reason why Pepper v Hurt is of such interest is that what was said by the Financial Secretary so clearly did.34

The considerations that have hitherto sustained the exclusionary rule have been of two kinds: the principled and the pragmatic. Considerations of principle have largely centred on the conventional divisions of function between the legislature and the judiciary. There are a number of strands here that have only in recent times been emphatically reasserted by senior Law Lords sitting both in their judicial and their legislative capacities.

First, the primary constitutional duty of a judge is to give effect to the intention of Parliament as expressed in the words of the statute: the statute alone is the uniquely authoritative statement of that intention. Second, ‘the rule of law as a constitutional principle requires that a citizen, before committing himself to any course of action, should be able to know in advance what are the legal consequences that will flow from it. Where those consequences are regulated by a statute, the source of that knowledge is what the statute says.’35 Accordingly, Lord Diplock continued, repeating a criticism he made during the second reading of Lord Scarman’s Interpretation of Legislation Bill 1980, the citizen is entitled to rely on the words of the statute alone, or where it is judicially interpreted, on an interpretation based upon what he might reasonably understand by those words .36 The point is not simply that when the citizen (or her lawyer) has to consult more than one source for a definition of her rights and duties, there is the potential for conflict between those sources, but that as a constitutional ground rule the law which establishes those rights and duties should be what passes as law, and not what a representative of the executive thinks it is. Under the rule of law, ministerial glosses expressed during debate ‘cannot affect the matter. Parliament, under our constitution, is sovereign only in respect of what it expresses by the words used in the legislation it has passed.’37 Thus the corollary of the proposition that what Parliament says (at least in the form of primary legislation) goes, is that it is only the judiciary, and no other person, who has the authority, finally and compellingly, to say what those laws mean. As Lord Reid put it shortly, ‘construction of the provisions of an Act is for the court and for no-one else’38;

33 V. Sacks, ‘Towards Discovering Parliamentary Intent’ [1982] Stat LR 143. In the Lords debate referred to above, Lord Irvine asserted that recourse to Hansard in Mandla v Dowell Lee [1983] 2 AC 548 ‘would have made it plain beyond all argument to the Court of Appeal that Parliament’s intention was the reverse of its interpretation of the statute,’ while Lord Goff referred anonymously to another case in which an earlier reference to Hunsard would have made a difference; op cir cols 280, 282.

34 A second instance from tax law is Vesrey v CZR (Nos Z & 2) [1980] STC 10, where examination of the debates makes it clear that the decision reached by the House of Lords in Congreve v CZR (1948) 30 TC 163 on what became s 478 of the Finance Act 1948 was not what the government had originally intended in 1936; see O.P. Wylie, ‘The Saga of s 478,’ Taration (1980) 94-96, 186-190, 214-217. Another example concerns the Guard Dogs Act 1975; see D. Miers, ‘Barking up the Wrong Tree: Determining the Intention of Parliament’ [1992] Stat LR 50.

35 Lord Diplock, Black-Clawson International v Papienverke Waldhoff-Aschaffenburg [1975] AC 591, at 638.

36 HL Deb vol405, col289 (13 February 1980). See also his Lordship’s remarks in Forhergill v Monarch Airlines [1981] AC 251, at 279.

37 Lord Diplock, Black-Clawson International v Papienverke Waldhoff-Aschaffenburg [1975] AC 591, at 638.

38 ibid at 614.


September 19931 Taring Perks and Interpreting Statutes: Pepper v Hart

and Lord Wilberforce, summarising these various strands at slightly greater length:

Legislation is England is passed by Parliament, and put in the form of written words. This legislation is given legal effect upon subjects by virtue of judicial decision, and it is the function of courts to say what the application of the words used to particular cases or individuals is to be . . . it would be a degradation of that process if the courts were to be merely a reflecting mirror of what some other interpretation agency might say.39

A second consideration of principle concerns parliamentary privilege. Until 1980 the House of Commons required that any reference to Hansard in court proceedings would amount to a breach of privilege, and required a petition for leave to use Hansard to be presented. This followed from Article 9 of the Bill of Rights which provides that proceedings in Parliament ‘ought not to be impeached or questioned in any court.’ The modern significance of this is to preclude civil or criminal proceedings against MPs based on what they have said under privilege. Although it is no longer necessary to petition for leave to cite Hansard in court, when he heard that the taxpayers were to argue that the House should consult the debates, the Clerk of the Commons wrote to the Attorney-General to the effect that its use for the purpose of determining what the Commons intended by s 156 amounted to a ‘questioning’ of the proceedings of the House, and would be a breach of privilege. None of their Lordships (including Lord Mackay, who dissented on pragmatic grounds) had any difficulty in dismissing this objection. The Lord Chancellor could not see ‘how such a use of Hansard can possibly be thought to infringe s 1, Art 9.’40 For the majority, Lord Browne-Wilkinson acknowledged that while Article 9 is of the ‘highest constitutional importance,’ even the most generous interpretation of ‘questioning’ could not plausibly contemplate a case where the whole purpose of the citation of debate is to clarify Parliament’s view. Indeed, the contrary applied: ‘far from questioning the independence of Parliament and its debates, the courts would be giving effect to what is said in them.’41

Since the discontinuance of the petitioning requirement, it has been open to their Lordships (given the reaffirmations by the House of the exclusionary rule during the 1970s and early 1980s, no lower court could feasibly have undertaken the task) to reconsider the constitutional objections to its use.42 In the event, they did not detain the House for long. The starting point for their rejection was the gradual relaxation that has occurred concerning the admissibility of pre-legislative documents such as Law Commission papers to ascertain the purpose of the legislation to which they gave rise, though not the meaning of the words in dispute. Courts have in recent years routinely referred to such documents for this limited use.43 A second factor was the decision in Pickstone v Freeman ~ l c , ~ in which the House referred to the debate on a statutory instrument designed to give effect to a Community obligation concerning equal pay, in consequence of which it read the instrument in order to do Parliament’s evident bidding, though the text itself was ineffective. The conclusion reached by their Lordships in Pepper v Hart also follows closely the tenor of the views expressed by some of the Law Lords who participated in a debate initiated by Lord Irvine in 1989. Lord Griffiths observed:

39 ibid at 629. 40 At 47e. 41 At 68c-d. See also 69b-c and 74e-f. 42 D. Miers, ‘Citing Hansard as an Aid to Interpretation’ [1983] Stat LR 98. 43 But not always: see Gornez [1993] 1 All ER 1 , decided shortly after Pepper v Hart. 44 [1989] AC 66.



We profess to attempt to give effect to the intention of Parliament when we are construing a statute and yet we refuse to check whether Parliament said what its intention was, what it intended to cover or what a particular word was perhaps intended to mean.45

That debate is of interest in that while the speakers were on balance content with the status quo, of the five members of the Appellate Committee who spoke, a majority (Lords Goff, Griffiths and Templeman) favoured some modification. Moreover, as Lord Browne-Wilkinson observed in Pepper v Hurt, while it had been reaffirmed by the House on a number of occasions in recent years, the ‘judicial antipathy to relaxing the rule has been far from uniform.’46 It might therefore be suggested that the House was looking for an opportunity to effect some change, a view which is borne out by the overwhelming support for the agreed position and from their Lordships’ remarks, embracing Lord Oliver’s reluctant conversion to Lord Griffiths’ enthusiastic a~ceptance .~~ Reviewing the considerations of principle, the House was firmly of the view ‘that, as a matter of law, there are sound reasons for making [the] limited modification to the existing rule’48 with which Lord Browne-Wilkinson concluded his speech. The final factor that appears to have persuaded the House was an acceptance of a purposive approach to the interpretation of legislation. As Lord Griffiths put it:

The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at extraneous material that bears on the background against which the legislation was enacted. Why then cut ourselves off from the one source in which may be found an authoritative statement of the intention with which the legislation is placed before Parliament .49

Beside considerations of principle are those that are pragmatic in nature. These principally concern the increased costs that clients (and the legal aid fund) will incur as lawyers routinely comb Hunsurd for the basis of an argument. This objection has often been voiced in the past, and differing views have been taken of its persuasiveness. For Lord Mackay , the objection is insuperable: ‘practically every question of statutory construction that comes before the courts will involve an argument that the case falls under one or more of [the heads agreed to by the majority].’50 However narrowly those heads are drawn, it would in any event be necessary to go through the motions in order to discover whether Parliament had said anything to the point before the principle could take effect. This was indeed the only practical objection which, in Lord Browne-Wilkinson’s view, had any real substance. The crock of gold sought by a client’s legal advisors may transpire to be a tin cup bought at considerable expense. But, his Lordship concluded, it is easy to overestimate the cost of such research, since if the debates show that nothing was said by the Minister, it will be unnecessary to go further.51

Drawing on the experience in New Zealand and Australia,52 where costs have not dramatically increased in consequence of the admissibility of parliamentary proceedings under broadly the same conditions as those agreed by the House (this 45 op cit col 296. 46 Lord Browne-Wilkinson, at 653f. 47 At 52a and 50a- b respectively. 48 Lord Browne-Wilkinson, at 64c-d. 49 At 50b. 50 At 41g.

52 51 At 6 1 ~ - d .

See Mr Justice Bryson, ‘Statutory Interpretation: An Australian Judicial Perspective’ [1992] Stat LR 187.



in contrast to the United States of America where no limitations exist), the House concluded that such as Lord Mackay’s fears were exaggerated. Indeed, Lord Bridge took the view that even if counsel sometimes came up empty handed, ‘where Hansard does provide the answer, it should be so clear to both parties that they will avoid the cost of litigation.’53 Nevertheless, there are now reports of cases in which counsel did search in vain for a crock of gold, leaving the client rattling the tin cup for contributions to these additional costs.54 An associated point concerns the availability of Hansard. When the Law Commissions and the Renton Report expressed their opposition on this ground,55 the Official Report of Parliamentary Proceedings was only available in hard copy. Since then it has become available on CD-ROM, and many sets of chambers and firms of solicitors will have access to it.

A further set of costs relate to the preparation of legislation. One of the points made by Lords Griffiths and Oliver was that as the parliamentary timetable becomes increasingly unsuited to the unceasing demand of government to legislate, mistakes will inevitably occur in the drafting of Bills. Recourse to debate may thus settle some difficulties so created. But this does not take account of the fact that if Parliamentary Counsel know that what Ministers say in debate will in turn be used in conjunction with the legislation to reach a construction of it, they will be drafting clauses under a further pressure to ensure compatibility; it is very much easier if you know that the version you are writing will have no competition. This objection was instrumental in the failure in 1980 of the first Interpretation of Legislation Bill based on the Law Commissions Report and sponsored by Lord Scarman, but it will now be a matter of concern for Counsel.

The Implications of Pepper v Hart

Given that some 90 per cent of cases heard by the House of Lords involve the interpretation of legislation, it perhaps should come as no great surprise that within two months of the decision in Pepper v Hart (26 November 1992), the House had determined three further appeals in part on the basis of what Ministers said in Parliament. Nevertheless, counsel were quick (in Warwickshire County Council v Johnson,56 opinions were delivered on 10 December) to use the opportunity to present arguments drawn from a source to which, in the lower courts, they had formally been denied access. However, it is important to note that the reference to Hansard in Warwickshire CC v Johnson did not, as was the case with the majority of their Lordships in Pepper v Hart, directly resolve the ambiguity; what it did was to confirm Lord Roskill in the decision he had reached.57

This is true also of the two other decisions, Stubbings v Webb58 and Chief Adjudication Oficer v Foster.59 In the former, Lord Griffiths referred to the

53 At 49j. 54 143 NLJ 666. 55 Law Commission, op cit n 31, para 61; The Preparation of L.egisZation (1975) Cmnd 6053,

paras 19.20- 19.26. 56 119931 1 All ER 299. Cartwright [1993] 56 MLR 227. 57 The drafting of s 20 of the Consumer Protection Act 1987 has been the object of adverse criticism; see

Lord Roskill, at 304a- h. The decision also gave rise to an ill-tempered exchange in the letters page of the New Law Journal about the lucidity of the draftsman and the competence of trading standards officers to interpret legislation correctly; 143 NLJ 8, 228, 356.

58 [1993] 1 All ER 322. 59 [1993] 1 All ER 705 (and see Neville Harris, this issue).

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remarks made by Lord Tucker (the chairman of the Committee upon whose report the Law Reform (Limitation of Actions etc) Act 1954 was based)60 in the debate on the Bill, and to remarks made by the Bill’s sponsor in the Commons.61 But, he added, he would have reached his decision ‘even without reference to Hunsurd. 762 In the latter, Lord Bridge similarly used the sponsoring Minister’s remarks to confirm his view of the powers that the Social Security Act 1986 conferred upon the Secretary of State. Indeed, all of their Lordships shared the view at the conclusion of the oral submissions that Miss Foster failed on the vires issue. If this is so, what ambiguity was there to resolve?

Like Lord Griffiths, Lord Bridge is an enthusiastic advocate of the value of using Hunsurd as an aid to the interpretation of ambiguous legislation. The significance, in his view, of recourse to the parliamentary material which in Foster ‘unequivocally indorses the conclusion I had reached as a matter of construction independently of that material,’ is ‘to illustrate how useful the relaxation of the former exclusionary rule may be in avoiding unnecessary litigation. ’ Lord Bridge continued, ‘if it had been possible to take account of parliamentary material at the outset, it would have been clear that it refuted the appellant’s contention and there would never have been any appeal to the commissioner, let alone beyond him.’63 Since there has never been any restriction on informal access to parliamentary material, it was of course open to counsel to consult the debates as a means of developing arguments for or against the vires (or any other) argument concerning the interpretation of the Social Security Act (though they would have had to couch their submissions in non-Hunsurd terms and on the basis of the conventional principles of interpretation). In that respect, Lord Bridge’s optimism, that ‘the effect of the new rule will be to prevent or curtail much litigation relating to ambiguous statutory provisions,’ may well be borne out, in that counsel will now be able to address courts directly on what Ministers have said.

But what are the longer term implications of Pepper v Hurt upon the preparation and interpretation of legislation? Consider first the impact of the House’s decision on the function of parliamentary debate on Bills. As Pepper v Hurt gives the government the opportunity to say in other words what the legal effect of a clause is to be, there will be an incentive to use the opportunity whenever some particularly difficult piece of legislation is to be debated, as a way of increasing the chances that the courts will interpret the section as the government wishes. Are we therefore to see (like planted Parliamentary Questions) carefully framed amendments at the Committee stage (which will of course need to be selected by the Chairman) permitting Ministers to clarify what kinds of conduct fall within a given clause? But precisely because judicial reliance may be placed upon their remarks, Ministers will have to be careful not to deviate from the advice that has been prepared by their civil servants and by Parliamentary Counsel, as the following remarks made by Lord Henley, a Government Minister, at the Committee Stage of the Education Bill 1992 make abundantly clear:

I very carefully said that I am advised that this is the case. In the light of the recent court case, Pepper v Hurt . . . it is very important that I know exactly what I am saying from the Dispatch Box.”

60 Reporf of the Committee on the Limitation of Actions (1949) Cmnd 7740.

62 At 32931. 63 At717e-g. 64 HL Deb Vol 545, cols 528-529 (29 April 1993). I am grateful to Dr Neville Harris who drew my

attention to this passage.

61 119931 1 All ER 322, 329d-g.


September 19931 Taring Perks and Interpreting Statutes: Pepper v Hart

For the inexperienced Minister, the desirability of keeping to the brief will thus be the more powerful. This advice will apply as much when Ministers are moving new government amendments as when they are responding to probing amendments put by opposition parties. If their remarks are self-contradicting, then they will presumably fail to meet the new criteria, which include clarity: this suggests that Ministers will be discouraged from doing much more than repeating the advice they have been given. This, it may be argued, places too great a significance to sticking to the script at the cost of allowing worthwhile change to occur through debate. Merely nodding assent or dissent to assertions put by the other side, on the other hand, would presumably not count as a ‘statement’ and thus no reliance could be placed upon such indications. These considerations will also apply where amendments to private Members’ Bills are debated, since the new rule includes remarks made by their sponsors. Since few private Members’ Bills succeed that are not supported by the government (and indeed may be government Bills in all but name), departments will also have to consider what responses are likely to be made by the sponsor, and correct them if necessary. All this suggests more work for Parliamentary Counsel. It also suggests more work for departmental lawyers where a statutory instrument is to be debated, since Lord Browne-Wilkinson’s conclusion refers to the relaxation of the exclusionary rule for ‘legislation,’ without qualification. It would be odd if the relaxation did not apply to instruments, since it was a debate on an instrument to which the House referred in Pickstone v Freeman p k , and that decision itself was strongly relied on by the House in the instant case as authority for its relaxation of the exclusionary rule.

It should further be noted that the House agreed that in addition to the ‘one or more statements by a minister or other promoter of the Bill’ a court could properly rely if necessary on ‘such other parliamentary material as is necessary to understand such statements and their effect.’ Pepper v Hart, therefore, also authorises reliance (but only in conjunction with ministerial or similar statements) on the notes on clauses that are prepared for ministers and attached to the Bill. This means that these too will have to be prepared with an eye to their potential for forensic use. All this suggests that government will have to institute mechanisms to ensure that what goes to Ministers by way of briefing for debate is also to be judge- proof.65 There is potential here for conflict between these various sources. The House’s ruling on Hunsard requires that the ministerial statements be clear, yet condition (b) explicitly allows such further reliance on other parliamentary material as assists understanding of their effect. It hardly needs to be said that two (three, including the Act) texts are not necessarily clearer than one.

The second main implication of Pepper v Hart concerns the relationship between the legislature and the judiciary as the authoritative interpreter of its wishes. Lord Browne-Wilkinson justified this new co-operative relationship in these terms:

65 Compare the conclusions of the enquiry into the legislative process that was being conducted by the Hansard Society at the same time as the appeal in Pepper v Hurt was being heard. One of the proposals it made was that the notes on clauses could be turned into notes on sections, to be published with the Act: Muking the Law; The Report of the Hansard Society Commission on the Legislative Process (1992) para 250ff. The suggestion that notes on clauses could become authoritative as notes on sections (though not so as to displace the statutory language) has been mooted in the past and remains controversial, at least with those who would be responsible for ensuring the legal accuracy of what those notes contain. See the comments by Mr F. Humphrey, Parliamentary Counsel 1967-80, 27ze Times, 4 May 1993 (letters). But much effort goes into the preparation by departmental civil servants of notes for the benefit of Ministers (and that of the authors’ own successors) which could, if made public, inform those addressed by the legislation of its intended scope; see comments by Mr G. Gammie QC, The Times, 7 May 1993 (letters).


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Courts are frequently criticised for their failure to [give effect to the words enacted by Parliament in the sense that they were intended by Parliament to bear]. This failure is due not to cussedness but to ignorance of what Parliament intended by the obscure words of the legislation. The courts should not deny themselves the light which parliamentary materials may shed on the meaning of the words Parliament has used and thereby risk subjecting the individual to a law which Parliament never intended to enact.@

It is difficult to gainsay these sentiments, but there is surely a real danger here of the courts becoming too close to the executive’s intentions. It is one thing to give effect to what Parliament has enacted as law, but quite another to give effect to ministerial statements about what the law is: a co-operative stance is, historically, not an uncontroversial option. As Lord Diplock said, though it is convenient to use the metaphor of ascertaining the intention of Parliament, what it omits to take into account is

that the court, when acting in its interpretative role, as well as when it is engaged in reviewing the legality of administrative action, is doing so as a mediator between the state in the exercise of its legislative power and the private citizen for whom the law made by Parliament constitutes a rule binding on him and enforceable by the executive power of the state. 67

One difficulty is that access to Hunsurd cuts both ways. In Pepper v Hart (and Warwickshire County Council v Johnson), recourse to Hunsard disclosed that civil servants were ignoring representations made by Ministers to Parliament and were seeking to treat citizens more onerously than those Ministers had initially indicated. No doubt taxpayers will applaud the decision of the House. But would they feel as happy about the relaxation of the exclusionary rule if the debates had shown that it was indeed the average cost that the government had intended for s 156? (In the circumstances, this would of course only have confirmed that the Court of Appeal and the majority of their Lordships were correct in their interpretation.) Would not the argument then be, if the government cannot get it right in the legislation, why should they be permitted a second bite at the cherry? As in taxation, would not this objection also be made in other areas where the executive exerts power over a person’s liberty or property - police powers, immigration, social security, the powers of local authorities and the like? Suppose that what is p r i m facie an ambiguous section whose mutually exclusive consequences render lawful (or not) the executive’s purported exercise of power over the individual, can, by reference to Hansard, clearly be shown to authorise the state’s actions. Might not it reasonably be objected that the court is here failing in one of its primary duties; viz, to protect the citizen against unclear laws?68 The objection applies equally to laws that are obscure or create absurdity, both of which are categories to which the Lords’ ruling applies. A readiness to interpret in the executive’s favour ambiguous etc provisions does not sit comfortably with the judiciary’s apparent willingness to adopt a more robust stance concerning its powers when hearing applications for judicial review.

And what of the citizen who has ordered his affairs according to what the law apparently says (absurd, ambiguous, obscure or not): is it just that he should now find himself prejudiced by statements which, when he took legal advice, would not have been judicially acceptable? Are tax (and other) lawyers even now combing back copies of the Official Report to check whether advice given five or ten years

66 Lord Browne-Wilkinson, at 67e. 67 Forhergill v Monarch Airlines, supra n 36. 68 L. Fuller, The Morulify o f h w (Newhaven, Mass: Yale University Press, 1969) ch 2.



ago is still good? There are implications here for the Lords and Commons libraries, whom I understand have already received many requests for assistance in tracking debate on sections (which need not of course bear the same clause number throughout their parliamentary career). It may be noted that the four cases decided under the new dispensation all concern Acts of recent origin; the question arises whether the debates on older legislation will be as productive of clear indications as to the government’s intentions. The potential for injustice thus lies also in the clarity (or lack of it) with which Ministers expressed themselves. Suppose that D1 and D2 are appealing against their convictions, the ground being that the applicable sections are ambiguous, and that in line with the principle that persons should not be penalised under a doubtful law,69 they should be given the benefit of the doubt. Answering a probing amendment on the section under which D1 has been convicted, the Minister made it clear that the clause was intended to apply to her circumstances. Answering a probing amendment on the section under which D2 has been convicted, the Minister did not make its intended application clear. D2’s appeal is allowed; Dl’s is dismissed. Lord Bridge would say, it seems, that had the CPS consulted Hunsurd in the first place, the debate would show that D1 was rightly proceeded against, and D2 not. The courts may well take a more robust view of what counts as clarity where criminal offences are concerned, but this still means that a person’s liability depends not wholly on what the law says, but on what the Minister says, either in statements or the accompanying notes.

Reference has already been made to the problems of duality of text. An associated issue concerns the priority to be accorded to those texts. Here the traditional view has of course been that it is the statutory text that has coercive authority over any other source of law, including earlier decisions of the House of Lords on the section in dispute. This coercion applies equally to cases where the courts have relied on pre-parliamentary material to elucidate the Act’s purpose. But Pepper v Hurt accords primacy to ministerial statements in the event of absurdity, obscurity and ambiguity. To put it mildly, this is a significant break with tradition. Even recent statements on what has long been called the ‘golden rule’ of interpretation, that is, that the court may select a secondary meaning of a statutory word or phrase where its ordinary meaning in context yields an absurdity in this case, have emphasised that this secondary meaning must be one that can be linguistically sustained by the words in dispute.70 In short, Pepper v Hurt is of the first constitutional importance: it has brought about a reversal in the relative authority of two kinds of parliamentary statement. In formulating its relaxation of the exclusionary rule, the House said, in the person of Lord Browne-Wilkinson, ‘Further than this, I would not at present go. ’ In Australia, where judicial access to ‘any relevant report of a committee of the Parliament or of either House of the Parliament that was made to the Parliament or to that House of the Parliament before the time when the provision was enacted’ is a statutory permi~sion,~~ the courts have sought since its introduction in 1984 to limit the effect of the Minister’s words. This is particularly so ‘when the intention stated by the Minister but unexpressed in the law is restrictive of the liberty of the individual.’ In such cases, however unfortunate it may be that the executive’s intentions have been thwarted by statutory oversight or inadvertence, ‘the function of the court is to give effect to

69 Bennion, para 129. 70 Srock v Frank Jones pipton) Ltd [1978] 1 WLR 231 per Lord Diplock, at 235. 71 Acts Interpretation Act 1901, s 15AB.

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the will of Parliament as expressed in the law.”* What then will be the response of courts here? Will they give priority to the Minister’s clear views (and irrespective of the quality of Minister) over unclear legislation whether the effect is to the advantage or disadvantage of the citizen; or will they adopt the view that where the Minister’s intentions benefit the citizen, those wishes will prevail; but that otherwise the executive is bound by the enacted law? Yes, Minister may yet prove to be an interpretive policy that does not receive unqualified approval.

Challenging the Vires of Social Security Regulations: Chief Adjudication Ofleer v Foster

Neville Harris * In Chief Adjudication OfJicer and Another v Foster,’ the Court of Appeal and the House of Lords considered the very important question of whether any of the social security appellate bodies, in particular the Social Security Commissioners, have jurisdiction in ordinary appeal proceedings to determine the validity of regulations. The Court of Appeal (but not the House of Lords) also considered the circumstances in which a court may ‘sever’ ultra vires provisions from the rest of an instrument leaving the remainder intact and legally applicable. Severance has been the subject of two recent House of Lords’ decisions (DPP v Hutchinson* and R v IRC, e x p Woolwich Equitable Building Society3), both of which were considered by the Court of Appeal in Foster. When Foster reached the House of Lords, both parties put forward submissions based on Parliamentary debate, as reported in Hansard, on the relevant statutory provisions: in so doing, they invoked Pepper (Inspector of Taxes) v Hart,4 a decision which in itself may have an important bearing on the interpretation of social security legislation by adjudication authorities.

The importance of Foster thus extends far beyond the not inconsequential social security issues it concerned, which involved the question whether parts of the regulations governing entitlement to the Income Support severe disability premium were legally valid. In this analysis of Foster, it is proposed to look at the social security issues first and then consider the jurisdictional questions.

The Vires Question

Income Support (IS) replaced Supplementary Benefit (SB) in April 1988. As was the case with SB, entitlement to IS depends on meeting the appropriate conditions of entitlement laid down partly in the Social Security Contributions Act 1992 (consolidating, inter alia, the Social Security Act 1986 (as amended)) and partly in

72 Both quotations in the text are from Re Bolron; e x p Beane (1987) 162 CLR 514, 518per Mason CJ. *Senior Lecturer in Law, University of Liverpool.

1 2

3 [1990] 1 WLR 1400. 4

[I9931 1 All ER 705 (HL). The Court of Appeal’s decision is reported at [1991] 3 All ER 846. [1990] 2 All ER 836; see A.W. Bradley, ‘Judicial Enforcement of UIrra Vires Byelaws: The Proper Scope of Severance’ [1990] PL 293-300.

[1993] 1 All ER 42; [1992] 3 WLR 1032. See the comment by D. Miers in this issue of MLR, at p 695.


Documents

Taxing Perks and Interpreting Statutes: Pepper v Hart