The Commissioners for HM Revenue and Customs v Kenneth Colquhoun: [2010] UKUT 431 (TCC) [2010] UKUT 431 (TCC)
[2]The appeal was heard at Edinburgh on 14 October 2010. Sean Smith, advocate, appeared on behalf of HMRC, and Mr Colquhoun represented himself. Each 20 party produced a Skeleton Argument. Legislation[3]Sections 148(1)&(2), 188(4)-(6) ICTA, and section 403(1) (within Chapter 3 of 25 Part 6) ITEPA are set out at paragraphs 23,24 and 26 of the FTT’s Decision. The critical provision is s148(2) which provides that tax is to be charged under Schedule E in respect of any payment made to an employee or former employee which is made, whether in pursuance of any legal obligation or not, either 30 directly or indirectly in consideration or in consequence of, or otherwise in connection with, the termination of the holding of the office or employment or any change in its functions or emoluments, including any payment in commutation of annual or periodical payments (whether chargeable to tax or not) which would otherwise have been so made. 35[4]It should be noted that there are transitional provisions which apply such that references in sections 403(4) &(5) and 404(3)(b) ITEPA to payments or benefits to which Chapter 3 of Part 6 applies include references to payments and benefits to which section 148 ICTA applied (see ITEPA Schedule 7, Transitional and 40 Savings, Part 6, paragraph 43). Background Facts[5]Mr Colquhoun was employed by Rosyth Royal Dockyard plc, part of the the 45 Babcock Group of companies to whom the Ministry of Defence sold the dockyard. There were negotiations between the Ministry, employers and trade union representatives about the funding of current redundancy packages. It was 4 agreed that each employee would receive a “buy-out payment”, and in return the existing redundancy scheme would be phased out. Paragraph 5 of the FTT decision found as fact that the arrangements in relation to Mr Colquhoun included the following:- 5 “The amount of the buy-out payment to which Mr Colquhoun became entitled was £33,148.71; and on 21 July 1996, Mr Colquhoun signed a form of acknowledgement in the following terms- 10 “The buy-out payment above is in respect of a change to contractual redundancy entitlements only. All other terms and conditions of employment remain unchanged. I accept the above buy-out payments as compensation in full 15 for my agreement to a change in my contractual redundancy entitlements as outlined in Mr AK Smith’s letter of 18 July 1996 .....”[6]In about January 1997, Mr Colquhoun received the buy-out payment 20 (£33,148.71). An advice note from his employer showed that £30,000 was being treated as non-taxable and £3,148.71 was being aggregated with his salary for tax purposes. No tax was deducted from the sum of £30,000 (see paragraph 6 and of the FTT’s Decision). 25 7. Mr Colquhoun was made redundant with effect from 31 August 2005. His redundancy entitlement statement disclosed a payment in lieu of notice of £29,664.00 and a redundancy payment of £61,930.59 (total £91,594.59). In his amended self assessment return Mr Colquhoun has sought a deduction of £30,000. HMRC opened an enquiry into his return and amended it so as to bring the 30 deduction back into charge (see paragraphs 8-10 of the FTT’s Decision) The FTT Decision[8]As it had been conceded by HMRC that in 1996/97 there had been no termination 35 of Mr Colquhoun’s office or employment, no change in functions or emoluments and no commutation of annual or periodic payments, the FTT concluded that s148(2) did not apply. In the FTT’s view, it would be stretching too far the taxation provision of that section if a payment to a continuing employee were to give rise to a charge to tax under Schedule E merely because the payment related 40 to a change in the employee’s contractual redundancy entitlement which were (sic) in any case wholly contingent upon a future redundancy. Whatever the reason for £30,000 not being taxed in 1997 that did not arise from the operation of section 188(4)ICTA. The whole exemption referred to in s403(1) ITEPA was therefore available to be set against the redundancy payment received in 2005 (see 45 paragraphs 39 and 40 of the FTT Decision) 5 Submissions on Appeal HMRC 5 9. Mr Smith submitted the FTT’s interpretation of s148(2) was too restrictive. The provision was, as originally enacted , a piece of widely drawn anti-avoidance legislation to which a significant list of payments was excluded. A payment in lieu of redundancy was not within the list. The payment received in January 1997, made in substitution for redundancy, should be regarded as having the same 10 character as redundancy payments and treated in the same way. Parliament could have excluded such substitutionary payments but did not do so. Section 148(2) does not require actual termination. It is sufficient that the payment was made in connection with the termination whether or not that event occurs. Moreover, there was no requirement of contemporaneity between the payment and the termination. 15 Mr Smith developed these arguments in some detail and referred to Walker v Adams 2003 STC (SCD) 269, and Mairs v Haughey 66 TC 273. Mr Colquhoun[10]Mr Colquhoun supported the reasoning of the FTT and submitted that the 1997 20 was not a substitute for a redundancy payment. The employers’ paperwork showed that the payment was made to reduce a balance sheet liability and there was no dependence on any future action for its payment. The premise upon which HMRC’s arguments proceed is unfounded. Section 148(2) is concerned with actual not possible redundancy. Contemporaneity or its absence was irrelevant. It 25 is difficult to make a connection with a termination when no employee is dismissed. The payment was not made in connection with the termination of employment and could not be related to a redundancy. HMRC accepted it was not a redundancy payment. Mr Colquhoun referred us to the Board of the Inland Revenue’s General Notes on that part of the Finance Bill which dealt with 30 Compensation for loss of office and other payments on retirement. Under reference to this material, he submitted that Parliament’s intention was to enact a catch-all provision where termination had occurred. Mairs concerned actual termination, and to statutory redundancy payments made at the time of termination. 35 Discussion Structure of relevant statutory provisions 40 11. The essentials of the statutory provisions with which we are concerned were originally enacted in section 37 of the Finance Act 1960 as an anti-avoidance measure to bring within the charge to income tax a variety of arrangements which made provision for payments as compensation for loss of office, in commutation of pension rights, in relation to changes in terms of employment and similar 45 arrangements. The statutory scheme then, as now, provided for a threshold (then £5000 and now £30,000) and a long list of exemptions to the payments caught by the anti-avoidance provisions. The exemptions were contained in s188 ICTA and 6 are now to be found in ss405-414 ITEPA. It is inherent in the scheme that aggregation will apply where more than one payment has been made.[12]The statutory language of section 148(2) has been broadly drawn. That can be 5 seen from the use of words and phrases such as indirectly and otherwise in connection with. Otherwise may simply mean in any way and is consistent with the Parliamentary intention to catch a wide range of payments. In Walker a compensation payment awarded for constructive dismissal of a former employee fell within the charge to the extent that it related to loss of income but not to the 10 extent that it compensated for injury to feelings. Special Commissioner O’Brien observed (in an appeal relating to s148 ICTA) that The word “otherwise” shows that the relevant connection or link may be looser than would be required for a strict causation test. While we are not entirely clear what is meant by a strict causation test we agree with the general sentiment that the word otherwise does 15 not restrict the scope of section 148(2) and is entirely consistent with a broad approach to the application of the phrase in connection with. As Mr Smith submitted, the language could hardly be less prescriptive. Termination and Contemporaneity 20[13]The FTT concluded that as there was no actual termination in 1997 there could be no charge under s148. We disagree. It is not necessary to read the phrase the termination as meaning a termination that is to say an event which must have occurred at or about the time the payment in question is made. An individual’s 25 employment will always terminate eventually either by dismissal, death or retirement (on account of age or some other reason)[14]A payment connected with the termination of employment is treated as income received on the date of the termination in respect of which the payment was made 30 (s148(4)(b)). Thus, the possibility is envisaged that payment and actual termination may not occur contemporaneously. If that is so, then payment and termination need not be within the same tax years. There is nothing in the legislation which limits the period between payment and actual termination. This is consistent with the broad structure of the legislation discussed above. 35 Mairs v Haughey[15]This case was cited to the FTT and to us for the proposition that a payment made in exchange for a right to payment should derive its character from the nature of 40 the payment it replaces. Lord Woolf, who gave the only reasoned speech, said at page 343G-H:- It is inevitable that if a payment is made in substitution for a payment which might, subject to a contingency, have been 45 payable that the nature of the payment which is made in lieu will be affected by the nature of the payment which might otherwise 7 have been made. There will usually be no legitimate reason for treating the two payments in a different way.[16]Lord Woolf returned to this theme at page 347C where he said 5 As already indicated, the payment made to satisfy a contingent right to a payment, derives its character from the nature of the payment which it replaces. 10 17. The FTT sought to distinguish Mairs on the ground that there was an actual redundancy situation and the payment arose at the time Mr Haughey’s employment with Harland & Wolff came to an end. While these may be distinguishing facts, they do not dilute the applicability of the underlying principle set forth by Lord Woolf. Whether Lord Woolf’s observations set forth a principle 15 or presumption does not matter for present purposes as we consider it to be prima facie applicable and not rebutted by the facts found by the FTT. Accordingly, a payment made to satisfy a contingent right to a redundancy payment will normally derive its character from the nature of the payment it replaces. Here, as the FTT found as fact (paragraph 5), the payment was for Mr Colquhoun’s agreement to a 20 change in his contractual redundancy entitlements. It takes its character from a redundancy payment which might have been payable, and such a payment falls within the scope of the charge to tax under section 148. Other Arguments 25[18]We consider that what may have been shown on the balance sheet of Mr Colquhoun’s employers at the time to be of no significance. We have not identified any discussion or finding of fact about this matter in the FTT’s decision. 30 19. We do not consider it legitimate to refer to the Board of the Inland Revenue’s General Notes on that part of the Finance Bill which dealt with compensation for loss of office and other payments on retirement (see Scottish Widows plc v HMRC 2010 CSIH 47 28/5/10 paragraphs 62-64). Even if we had taken these Notes into account our decision would have been the same. 35 Conclusions[20]In our view, the FTT fell into error(i) by considering that termination meant an actual termination, and consequently that there had to be contemporaneity 40 between the payment and the termination and(ii) by failing to apply or apply properly the observations of Lord Woolf in Mairs, which we consider to be relevant and applicable to the circumstances of Mr Colquhoun’s appeal.[21]If the FTT’s decision were correct, a payment in lieu of redundancy would not be 45 taxable as an emolument or under section 148 ICTA (now 403 ITEPA); this would plainly be contrary to the intention of the scheme enacted by Parliament. 8 Result[22]We allow the appeal. The HMRC amendment to Mr Colquhoun’s self-assessment return is reinstated. We invite submissions on expenses in writing within twenty 5 eight days of the release of our Decision. In the absence of such submissions, no order for expenses will be made. 10 J GORDON REID QC, F.C.I.Arb JUDGE OF THE UPPER TRIBUNAL RELEASE DATE: 6 December 2010 15
Cited in 8 later judgments