The High Court upheld a decision of a special commissioner that sums paid to certain employees who were made redundant were emoluments from the relevant employees' employments so that the employer 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. From 1992 onwards the taxpayer and trades unions representing its employees had entered into a series of memoranda containing specific provisions relating to redundancy. At various times between 1996 and 2001 it made a number of its employees redundant. A question arose as to whether the employees should receive the notice to which they were entitled or payment in lieu. After discussions with the trade unions concerned, the taxpayer asked the employees to agree payment in lieu of notice as part of their redundancy packages and stated that the payment in lieu of notice was to be calculated and made in accordance with the provisions of the memorandum.

The bulk of employees agreed to payment in lieu of notice and payment to them was calculated and made in accordance with the provisions of the memorandum. Employees who insisted on their full period of notice were given it. The taxpayer did not deduct income tax or NICs from the elements of the severance payments representing pay in lieu of notice on the basis that they were redundancy payments taxable under ICTA 1988, s. 148 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 the relevant payments and notices of decision (under the Social Security Contributions (Transfer of Functions, etc.) Act 1999, s. 8) on NICs due on them.

The issue before the commissioner was whether the payments in lieu so calculated and paid were emoluments from the employees' employment. The special commissioner held that the payments were chargeable to income tax and NICs as emoluments from the employees' employments under Sch. E under ICTA 1988, s. 19 ((2006) Sp C 541). The special commissioner held (and there was no appeal from his finding) that the contracts of redundant employees (other than office staff) incorporated the memorandum.

Issue

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

Decision

Lightman J (dismissing the appeal) said that the core issue in the case was that of construction of the terms of the employees' contracts of employment and (most particularly) the construction of the memorandum.

Turning first to the basic materials available for the exercise in construction, the first was the express term of the contract providing that employees were entitled to receive notice as there provided. The entitlement was expressed as unconditional. The second was the provision in the memorandum for the situation where payment was made by the taxpayer to employees in lieu of notice. The issue raised was the impact of that provision on the express term of the contract and whether the memorandum by that provision limited or abrogated the right to notice.

The memorandum was plainly an agreement designed by the trade unions representing the employees and agreed to by the taxpayer to afford additional protection and compensation to employees in respect of dismissal for redundancy purposes: it could not sensibly be thought to have had the purpose of derogating from the employees' existing rights under the express terms of the contract. If the memorandum (as contended by the Revenue) conferred on the taxpayer the contractual right to be excused from the obligation to give notice on payment in lieu of notice, it would so derogate. An employee might have perfectly good reasons for wishing his contract of employment to continue for the full notice period. For example it might be of advantage to him on an application for new employment during the notice period to be able to apply as a person in present employment.

A breach of contract by the employer might operate to the advantage of the employee. If an employee was dismissed without giving him the period of notice to which he was entitled and was paid in lieu of notice, the employer was in breach of contract and his breach of contract might not merely expose him to a claim in damages (which might or might not be satisfied by the payment in lieu) but might operate to release the employee from an otherwise binding restraint of trade covenant which under the terms of his contract came into effect when he ceased to be employed. The construction contended for by the Revenue, entitling the taxpayer to dismiss without notice, was not tenable.

The legal position was that employees were entitled to notice and they were entitled under their contracts (and in particular the memorandum) if ‘paid in lieu of notice’ to specified payments in lieu of notice whether payment in lieu of notice was agreed by the employees or not. The relevant employees did so agree. The taxpayer, having agreed with the employees that they should be paid in lieu of notice, duly made the payments to the employees of the sums due as debts under their contracts. There was no variation or discharge of their contracts of employment. The payments were made under and pursuant to the provisions in their contracts of employment from their inception or 1992 (whichever was the later) in circumstances which their contracts expressly contemplated, namely payment in lieu of notice. An event contemplated and provided for in their contracts occurred triggering the clause in their contracts entitling them to payment and the payment constituted emoluments from the employees' employment under s. 19. No consideration of the legal principles applicable in other situations was called for.

Chancery Division.
Judgment delivered 22 February 2007.