A special commissioner decided that monthly payments made under a permanent health insurance policy to a former employee, the benefit of which had been transferred to him by his employer upon termination of his employment, were deemed to be pension payments taxable under ICTA 1988, s. 19.

Facts

The taxpayer was an employee of JLL from 1 January 1998 until 15 March 2002, when his employment was terminated by reason of redundancy. He was absent from work due to ill-health from September 2000. From 1 March 2001 until 15 March 2002, the taxpayer received £60,000 p.a. (less tax). That amount was made up of (a) £50,000 p.a., permanent health insurance (PHI) benefits received from the insurance company; and (b) £10,000 p.a., ex gratia augmentation provided by JLL. At the termination of the taxpayer's employment, JLL agreed to transfer the taxpayer's benefit under the PHI policy held by it, so that that benefit should continue and be held in the taxpayer's name.

The taxpayer and JLL entered into a compromise agreement dated 15 March 2002. The compromise agreement contained a recital to the effect that the insurance company had agreed that on the termination of the taxpayer's employment, the PHI policy held in respect of the taxpayer would transfer to, and be held in, the taxpayer's name. The agreement provided for the termination of the taxpayer's employment on 15 March 2002 and payment up to that date of all salary and contractual benefits. In addition, it provided that JLL would pay to the taxpayer £17,885 enhanced redundancy payment and £12,500 compensation payment as compensation for loss of his employment, and also £47,500 in settlement of the taxpayer's prospective personal injury claim related to alleged work-related stress (‘the PI payment’). It was provided that the PI payment would be subject to deduction of basic rate tax prior to payment.

The agreement further provided that the taxpayer agreed to accept the compensation payment and the PI payment in full and final settlement of his claims for compensation for unfair dismissal, redundancy and disability discrimination, and his prospective personal injury claim related to alleged work-related stress. The taxpayer also warranted that the claims so settled amounted to the entirety of the claims which he believed he had against JLL or any associated company or their directors, etc. arising out of or in connection with his employment including its termination. It confirmed that the taxpayer had taken independent legal advice. Finally, the consideration given by JLL was said to be given without any admission of liability.

The taxpayer was (subject to conditions) to continue to be paid PHI benefit from 16 March 2002 until 16 July 2015 at the rate of £4,375 per month (£52,500 p.a.) increasing annually by five per cent compound. The taxpayer also acknowledged that the continuing payment of benefits to him would be subject to tax.

The taxpayer appealed against a notice of assessment for the year 2002–03 and amendments to his self-assessments for the years 2003-04 and 2004-05.

In oral evidence, the taxpayer stated that he was still out of work and had no chance of returning to work. He said that he thought he should not have signed the Continuation of Benefit' document and that his mental condition at the time he signed it (30 April 2002) was extremely poor.

Issue

Whether the amounts to which the notices of assessment related were properly chargeable under ICTA 1988, s. 19(3) as a pension, or under s. 18(3); or whether the amounts to which the assessments related constituted in principle personal injury damages for the purposes of ICTA 1988, s. 329AA, or otherwise comprised or represented instalments of capital.

Decision

The special commissioner (John Walters QC) (dismissing the appeal) said that the evidence disclosed no circumstances which indicated that the payments under the PHI policy from the insurance company to the taxpayer were capital in nature. On the contrary, they were benefit payments which continued to be made as though the taxpayer were still included in the policy. The fact that the policy envisaged that the payments would be made by means of a special continuation policy in the taxpayer's name (and that that had not been done) did not affect the position. Payments were made by the insurance company to the taxpayer direct. The payments, which continued to be made so long as the taxpayer was unable to work, were not made in discharge of any claim for an amount (or estimated amount) of damages.

The payments were more aptly described as pension payments taxable under Sch. E, having regard to their origin as benefits of the taxpayer's employment, than as annual payments taxable under s. 18(3). The payments did not come within ICTA 1988, s. 329AA. The evidence disclosed no agreement settling a claim for damages for personal injury whereby the damages consisted wholly or partly of the payments under the PHI policy. That claim was expressly settled by the payments of £12,500 and £47,500 which were accepted by the taxpayer under the compromise agreement in full and final settlement of his prospective personal injury claim related to work-related stress. The evidence confirmed that those provisions of the compromise agreement reflected the reality of the position.

No PHI insurer would make payments after a termination of employment unless it was required to do so. The continuation of the benefit payments in the circumstances envisaged by the PHI policy did not have any cost implications for JLL. It was a benefit which was available as an adjunct of the policy and JLL was content that the taxpayer should be given the benefit of it, provided that was achieved in such a way that JLL was not exposed to any further related liability in the future.

Accordingly, the condition set out in s. 329AA, for there to be an agreement made settling a claim for damages for personal injury on terms whereby the damages were to consist wholly or partly of periodical payments, was not met in this case.

(2007) Sp C 625.
Decision released 8 August 2007.