A special commissioner decided that payments made under a stock bonus plan made on termination of a taxpayer's employment were payments in connection with termination of employment taxable under ICTA 1988. s. 148.

Facts

The taxpayer was employed in 1998 as a vice president in the London offices of JP Morgan ('the company'). For employment law purposes he had been in continuous employment with members of the group since 3 September 1979 when he was first employed as a management trainee. During that period he had for a number of years been employed or seconded within the group for service abroad.

During his employment the taxpayer was entitled under the terms of his employment to benefits under the stock bonus plan, to stock options under the stock incentive plans of the same company and to shares purchased by him under the Morgan Guaranty share purchase plan. He also had benefits under two company pension plans. A significant proportion of the remuneration of senior employees at the company was given by way of incentive compensation in the form of various benefits that did not become fixed as entitlements or amounts until time had past. One of the benefits consisted of awards under the stock bonus plan.

In October 1998 the taxpayer was given at a termination interview a proposed employment termination agreement. Following the end of his employment, the taxpayer received a number of payments or benefits from his employer. They included a disbursement or vesting under its stock bonus plan in February 2001 having the undisputed value of £64,726.71 in respect of which income tax of £14,239.72 and national insurance of £45.90 was withheld. An issue arose whether the disbursements from the plan should be taxed under ICTA 1988, s. 148 or s. 19.

The taxpayer argued that the payments were not emoluments from his employment taxable under ICTA 1988, s. 19 but were taxable under s. 148. The Revenue submitted that the plan was a method of awarding additional remuneration.

Issue

Whether the payments received under the stock bonus plan were taxable under ICTA 1988, s. 148 or s. 19.

Decision

The special commissioner (Malcolm Palmer) determined that the payments received under the stock bonus plan were taxable under ICTA 1988, s. 148 and not s. 19.

Section 148 charged payments and other benefits in connection with the termination of a person's employment that were 'not otherwise chargeable to tax'. So if there was a charge under s. 19 there could not be a charge under s. 148.

On the facts, the payment made to the taxpayer was from the ending of his employment, from the settlement of claims relating to benefits that he might reasonably have expected to come to him after the date his employment ended if he had continued in employment and his action or inaction as an ex-employee. Clearly it was 'in connection with the termination of’ his employment.

The judgment in Henley v Murray (1950) 31 TC 351 was Court of Appeal authority for the proposition that a payment made in consideration for an agreement to surrender rights of employment could be treated as a payment that was not from employment. It was of course a decision on its own facts, but the argument in the present case seemed much stronger for denial that the payment in question was from the employment. The taxpayer did not agree to surrender his rights to employment. His employment had ended. In substance he was surrendering his rights, or feared rights, to pursue a possible claim for damages. He was surrendering those rights in part in consideration of a promise not to treat his possible benefits under the plan as lapsed because his employment had ended. The case was also a warning-the point was not in issue-that a payment under such a promise that specifically represented remuneration up to the date of termination might nevertheless be treated as from the employment.

One had to distinguish between, on the one hand, payments under a settlement agreement such as the termination agreement that were in satisfaction of entitlements to remuneration or a share of profits existing at the time of the agreement or earlier ending of employment and, on the other hand, payments in compensation for later rights that had been surrendered or lost. The question was whether the payment was made in satisfaction of an existing entitlement to remuneration or whether it was paid under the termination agreement in satisfaction of or for something else.

The commissioner was satisfied that the termination agreement was a genuine settlement by the company and the taxpayer of his possible rights as a result of the involuntary termination of his employment. Whether or not there was any action by the company that would have been found by a court as a breach of contract was a fact that had deliberately been left undecided. But what was clear was that the whole tenor of the letter constituting the termination agreement and the facts leading up to it showed that it was a genuine settlement by the parties of rights that the company considered the taxpayer might have. When determining whether a payment was from the employment or for some other reason it was hard to distinguish between a payment of a sum in satisfaction of an award for damages for breach of employment rights; a sum paid in settlement of an action commenced for damages for breach of employment rights, as in Du Cros v Ryall (1935) 19 TC 444; a sum paid in settlement of claims that, if made in an action for breach of employment rights, would succeed; and a sum paid in settlement of such claims that the employer feared might succeed.

If a sum paid in satisfaction of a court action was accepted to be for something other than from employment, then there was no reason why a sum paid, as here, under and as a result of a genuine settlement agreement, should not also be regarded as from something other than the employment. The authorities showed that there must be some distinction made for a payment, or an apportionment of a payment, that represented rights that had accrued for services rendered up to the time of the ending of the employment (EMI Group Electronics Ltd v Coldicott (HMIT) [1999] BTC 294 and Richardson (HMIT) v Delaney [2001] BTC 392 distinguished; Mairs (HMIT)n Haughey [1993] BTC 339 considered).

(2005) Sp C 501. Decision released 7 September 2005.