HMRC appealed against the First-tier Tribunal's decision that a lump sum payment for a change to an employee's future contractual redundancy terms was not a payment in respect of termination of employment and therefore did not count towards the £30,000 exemption.

The taxpayer had been in the same employment from 1973 until he was made redundant in 2005. In 1996 he had received a payment from his employer to buy out his enhanced redundancy rights. Income tax was calculated on the excess over £30,000. In 2005 the taxpayer was made redundant and he sought to shelter this payment from tax by using the £30,000 tax exemption. HMRC submitted that the £30,000 tax exemption, was used to shelter the 1997 payment and so the whole 2005 redundancy payment was taxable.

The First-tier Tribunal held that both the 1996 and 2005 payments should only be aggregated for the purpose of the £30,000 exemption when both payments are taxable under section 148 ICTA (Income and Corporation Taxes Act) 1988 and now in similar terms, s401 ITEPA (Income Tax (Earnings and Pensions) Act) 2003. As there was no actual termination of employment and no change in the functions or emoluments the payment could not have been taxable under s148 ICTA.

HMRC appealed the decision and submitted that the First-tier Tribunal's interpretation of s148 was too restrictive. It was HMRC's argument that the provision was, as originally enacted, a piece of widely drawn anti-avoidance legislation to which a significant list of payments were excluded. Such a list did not include a payment in lieu of redundancy. In addition, HMRC contended that section 148 did not require actual termination but only that the payment was made in connection with the termination whether or not that event occurred.

The taxpayer submitted that section 148 was concerned with actual, not possible, redundancy and the payment was not made in connection with the termination of employment and could not be related to a redundancy.

The Upper Tribunal considered that the First-tier Tribunal fell into error by considering that termination meant an actual termination. The Court was of the view that it was not “necessary that the event occurred at or about the time the payment was made. An individual's employment will always terminate eventually either by dismissal, death or retirement.” The Court's interpretation of section 148 was that the payment and termination need not be within the same tax year and that there was nothing in the legislation which limit the period between payment and actual termination.

Drawing from the underlying principals in the case of Mairs v Haughey, also cited by the First-tier Tribunal, the Upper Tribunal found that the payment was in respect of a change to the taxpayer's contractual redundancy entitlements. As the payment took its character from a redundancy payment which might have been payable, the payment fell within the scope of the charge to tax under section 148.

The Upper Tribunal allowed HMRC's appeal.