Payments made to pensioners to compensate them for the withdrawal of a concessionary benefit previously made available to them were given'in connection with past service' within ICTA 1988, s. 612(1), with the result that the payments were taxable under s. 596 A as benefits under a non-approved retirement benefits scheme.

Facts

The taxpayer bank formerly provided pensioners, and their widows and widowers, with certain free tax-related services, on a concessionary basis. The taxpayer withdrew those services and made ‘goodwill’ payments to the pensioners affected to compensate for withdrawal of the services. The Revenue considered that those payments were taxable as benefits provided under a non-approved retirement benefits scheme under ICTA 1988, s. 596A.

The special commissioner allowed an appeal, holding that the payments were not taxable under s. 596A because they were not made ‘in connection with past service’ within s. 612(1) because they were no form of reward for past services ((2006) Sp C 520).

The Revenue appealed successfully to the High Court which held that the special commissioner had misdirected himself on the interpretation of ‘relevant benefits’. The proper conclusion on the facts was that the payments were relevant benefits provided under a retirement benefits scheme and chargeable to tax under s. 596A ([2006] BTC 771). The taxpayer appealed.

Issue

Whether the payments were given in connection with past service within s. 612(1) so as to be benefits under a non-approved retirement benefits scheme within s. 596A.

Decision

Arden LJ (Scott Baker and May L JJ agreeing) (dismissing the appeal) said that the primary question was the proper meaning of the words ‘in connection with past service’ in ICTA 1988, s. 612(1). The expression ‘in connection with’ could describe a range of links and the court had to look closely at the surrounding words and the context of the legislative scheme. The other parts of the definition of ‘relevant benefits’ and the surrounding provisions of the legislative scheme would inform the court as to the extent of the link required by any particular provision. Thus the court had to examine the function or purpose of the definition of ‘relevant benefits’. Here, the purpose of the definition was to identify the chargeable payments under a retirement benefits scheme. Furthermore, it must have been foreseen that, over the life of the scheme, changes might be made to benefits which would not simply involve a straight exchange or substitution of one benefit for another. On occasion, there would be loss of a benefit and the rendering of some monetary recompense. The charging provisions could only fairly apply if they applied to the giving of the new benefits, or recompense, as much as to the giving of the benefit originally provided by the scheme.

A connection might be indirect for the purpose of the definition of relevant benefits. Accordingly, it was possible that the making of a payment would have a relevant connection with more than one thing. In that situation, it was necessary to see whether the connections could co-exist, or whether one would actually exclude the other. If, on proper analysis, the further connection displaced a prior connection, the prior connection ceased to be a relevant connection for the purpose of s. 612(1). However, the definition of ‘relevant benefits’ was not unbounded. There had to be a link with service. The special commissioner's finding that the payment was in fact a deferred reward imposed an unjustified gloss on the definition. Since the expressions ‘pension’ and ‘gratuity’ did not entail any necessary element of reward, the expression ‘other like payment’ could not do so either. A pension was not an emolument and there was a separate charging provision for deferred emoluments (ICTA 1988, s.19 (4A)).

In this case, the class of recipients was limited to those who had been employees or who had connections through an employee by being the surviving spouse or personal representatives. No one else could come within the class. The criterion for selection of the recipients was a strong factor to which substantial weight should be given. The other facts, such as the calculation of the one-off payments by reference to the age of the recipients and the complexity of their tax affairs, were subsidiary matters which were secondary to the selection of the class of recipients.

The definition of ‘relevant benefits’ was very wide and included, for instance, a gratuity or other like benefit. There was no necessary reason why a gratuity should be related to the past service. Moreover, a pension was not an ‘emolument’. Accordingly, the definition of ‘relevant benefits’ could not be said to import any necessary connotation that the benefit must be some form of emoluments from employment. Consequently, provided that there was a link between past service and the giving of the one-off payment there was no reason why the payment had to be under an occupational pension scheme or to have the character of a reward for service. That necessarily meant that the application of s. 596A was wider than it appeared at first glance but a limitation was imposed by the requirement that the gratuity be ‘given’ and the need for some ‘connection with past service’. The word ‘given’ imported a requirement that the person making the payment should know the facts that constituted the necessary connection between the payment and the past service. It did not import any requirement that there should be an element of reward.

In all the circumstances, the special commissioner had misdirected himself as to the meaning of the expression ‘in connection with past service’. On the facts as found by the commissioner, there could be only one conclusion, namely that the giving of the one-off payments was in connection with past service. The weight to be given to the criterion adopted for selection of recipients of the one-off payments was not displaced by any other fact and made it inevitable that the appeal to the special commissioner, and to the Court of Appeal, had to fail. An order would be made that the one-off payments were ‘relevant benefits’ for the purpose of s. 612(1).

Court of Appeal (Civil Division).
Judgment delivered 11 May 2007.