This case considered whether payments made to employees for less favourable pension entitlements were taxable payments as “earnings from employment”.

Background

In 2006 Scottish & Newcastle and Kuehne & Nagel set up a joint venture company which involved the transfer of Scottish & Newcastle's drink distribution business along with 2,000 employees to the new joint venture company. The employees transferred were concerned that the pension scheme with the new company was not as generous as the defined benefit pension scheme with Scottish & Newcastle. Industrial action was threatened in relation to the pension position.

As a remedy for the employees’ concerns Scottish & Newcastle funded payments totalling £5,000 per employee, of which £200 represented compensation for loss of a beer allowance. The £200 allowance was accepted as a taxable payment; however, the employees disputed HMRCs decision that the balance of £4,800 was a taxable payment liable to income tax and to National Insurance Contributions (NICs).

The appeal against the decision of HMRC was first brought to the First Tier Tribunal (the FTT), in which the tribunal dismissed the taxpayers’ appeal. The case was then appealed before the Upper Tribunal (the UT), which upheld the decision of the FTT. The taxpayers were granted permission to appeal and the case was brought to the Court of Appeal which delivered its judgement in January of this year.

Decision

The Court of Appeal held that the use of the word ‘from’ in the statutory expression ‘earnings from an employment’ and ‘earnings derived from an employment’ purported that there had to be a relevant connection or a link between the payments to the employees and their employment. The question of taxability required being able to characterise the payment as one ‘from employment’ if it derived ‘from being or becoming an employee’ and was not attributable to something else. It was not necessary that employment was the sole cause of the payment but it did have to be sufficiently substantial to characterise the payment as one from employment.

In this case, the payments were held to have been made “to avoid industrial action and were in reference to the services of the employees rendered and in the nature of a reward, inducement or incentive to work willingly for the joint venture company in the future”. Such facts were sufficient to establish the necessary relevant connection or link between the payments and the recipients’ employment. The Court of Appeal upheld the decisions of the FTT and UT finding that the payments were emoluments from the employment and accordingly taxable.

The full judgement of the Court of Appeal is available on Baili at http://www.bailii.org