A special commissioner decided that sums paid to certain employees who were made redundant were emoluments from the relevant employees’ employments so that the taxpayer should have deducted and accounted for PAYE and National Insurance contributions (‘NICs’).

Facts

The taxpayer was an international paper company that produced and sold hygiene products, packaging solutions and paper publications. It had various manufacturing plants located in Great Britain. At various times between 1996 and 2001 it made a number of its employees redundant. When it did so it made payments to the redundant employees which generally included sums calculated by reference to unexpired notice periods. The taxpayer did not deduct income tax or NICs from the elements of the severance payments representing pay in lieu of notice (‘relevant payments’) on the basis that they were redundancy payments taxable under s. 148 of the Income and Corporation Taxes Act 1988 (‘ICTA 1988’) and not emoluments taxable under s. 19.

The taxpayer appealed against notices of determinations (under the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682), reg. 80) on income tax due on termination payments; and notices of decision (under the Social Security Contributions (Transfer of Functions, etc.) Act 1999, s. 8) on NICs due on termination payments. The Revenue accepted that the elements of the redundancy payments other than components relating to the payments in lieu of notice were not derived from the employment. No decision or determination was made in respect of those elements.

The employees who were made redundant were treated by the taxpayer as subject to the terms of the relevant memorandum of agreement made between the taxpayer and the relevant trade unions which set out the terms for redundancy pay and included statements relating to pay in lieu of notice. On the appeal, a distinction was made between office and non-office staff.

Issue

Whether payments made to redundant employees were emoluments from the relevant employees’ employments.

Decision

The special commissioner (Charles Hellier) (ruling accordingly) said that the statutory language was fairly simple: a payment was made taxable as employment income by the Income and Corporation Taxes Act 1988, s. 19 if it was an emolument from the employment; the payment was subject to NICs if it was remuneration or profit earned from the employment. It was accepted by both parties that in relation to the payments at issue the question which determined whether income tax or national insurance was applicable was the same: whether the payment was ‘from’ the employee's employment. It was necessary to determine for each relevant employee what were the provisions under which the payment was made. That required first an examination of what the relevant terms of the employment were in each case, and second a determination of whether payments were made under those terms or otherwise. The taxpayer provided non-office staff with a written statement of certain terms on which he or she would be employed. That was not the contract between the employer and employee because it did not record the wages or salary to be paid to the employee. But it was a clear representation by the employer that the terms described were part of that contract. Such a statement, when signed by the employee indicating that it had been received and understood close to the start of the employment, constituted some form of acceptance by the employee that he or she also agreed to those terms as part of his or her contract and therefore they were part of the contract of employment. Accordingly, on a balance of probabilities the terms of the written statements formed part of the terms of the employees’ contracts. There was no doubt that, if the written statement formed part of the employment contract, the provisions in the collective agreement between the taxpayer and the trade unions which were ‘details concerning redundancy rights and procedures’ were expressly incorporated into the employment contract, at the very least so far as they were provisions which touched directly on the relationship between employer and employee. In relation to office staff who did not receive the standard written statement, the terms of the memorandum of agreement were not included in their contracts by custom and practice.

In the instant case, the right to the payment in lieu of notice did not arise under the terms of the agreement on which the employee originally agreed to serve: it arose under the terms of that agreement as varied by the later acceptance of short notice. The effect of the redundancy provisions in the collective agreement was that if the employer wished to terminate an employee's contract by reason of redundancy then it was required to give the normal notice period but could ask the employee to accept short notice. The agreement of the employee to go on short notice varied the terms of the contract of employment. If an employee accepted shorter notice his contract remained on foot but was amended by the agreement to take short notice and he then became entitled under that amended contract to a sum which incorporated the redundancy payments and the payment in lieu of notice.

Notwithstanding the decision in Richardson v Delaney [2001] BTC 392, the tribunal was bound by Henley v Murray (HMIT) (1950) 31 TC 351 to conclude that a payment for giving up the whole of an employment contract was not taxable. But here only a part of the rights under the contract was renounced – the right to work notice: the employee retained his other rights under the contract (including the rights to redundancy payments), the contract had been amended and had stayed on foot. The employee had agreed to an amendment to the contract (albeit one as a result of which the contract would last for a shorter time) and not to its abrogation. The term amended was a right under the contract which was directly connected with his employment. As a result, the source of the payment was not the abrogation of the contract but the change in his rights as an employee and therefore the payment derived from his employment. The surrender of one of the rights under a contract was different from the surrender or abrogation of all rights under the contract. In Henley v Murray, a distinction was drawn between a case where the contract persisted although the right of one party to call upon the other for performance of its terms might be modified, and a second class where the contract itself went altogether. A conclusion that a payment for such modification might be taxable was not prevented by Henley v Murray.

That analysis did not run up against the reasoning in Hunter (HMIT) v Dewhurst (1932) 16 TC 605 and Lord Atkin's statement that a ‘sum of money paid to obtain a release from a contingent liability under a contract of employment cannot be said to be received “under” the contract, is not for services rendered or to be rendered under the contract’. In the former case the payment was the consideration for the total abandonment of the contract which ‘goes altogether’ (see Henley v Murray); in the latter case the contract continued although some part of it had been turned to account.

Accordingly, part of any payments in lieu which derived from the agreement to leave on short notice was ‘from’ the employment.

The employee's agreement in relation to the notice period was separate from the employer's agreement to provide redundancy compensation and the employee's receipt flowed from his agreement and was not redundancy compensation. Although the payment in lieu shared some characteristics, it was not compensation for the effects of redundancy but for taking short notice. In all the circumstances, payments in lieu made to employees whose contracts incorporated the terms of the memorandum of agreement were derived from their employment. However, in the case of office staff, the payments were not in return for the modification of their contracts but for the cancellation of the contracts. The contracts disappeared in their entirety. There was no pre-existing right to the redundancy payment element: it was consequent only on the abrogation and paid only under the agreement to abrogate. The payment was made pursuant to the terms of an agreement to terminate those contracts. Henley v Murray was authority for the conclusion that such sums were not derived from employment.

That conclusion was unaffected by the division of the sum into redundancy amounts and amounts for pay in lieu of notice because it was agreement to accept payment, and the subsequent payment, of the combined sum which terminated the contract. It was also clear that there was nothing in the decisions of the House of Lords after Henley v Murray which cast doubt on the reasoning in that case. The payment for the abrogation of the contract was ‘not paid as a reward for past services or as an inducement to enter into the contract and provide future services but is paid for [another] reason’. It was therefore not received from the employment.

The fact that a payment was made habitually did not determine where it came from. Thus if an employer habitually made payments in lieu of notice or payments otherwise for the abrogation of a contract, that fact did not on its own change the nature or source of a particular payment.

(2006) Sp C 541. Decision released 23 May 2006.