[2009] UKFTT 379 (TC)

TC00314
Appeal numbers SC/3218/2008
								     SC/3012/2009
								     SC/3013/2009

Income Tax – Earnings from employment –Whether payment made on TUPE transfer to recognise loss of pension scheme benefits but also to avoid industrial action was ‘from employment’ – Whether capital payments could not come from employment – Whether TUPE meant that for ITEPA purposes there was no change in employment – Held, taxable
NIC – Earnings derived from employment – Whether same meaning as ‘from employment’ 

FIRST-TIER TRIBUNAL
TAX CHAMBER
 
KUEHNE + NAGEL DRINKS LOGISTICS LTD
MR A STOTT
	MR A C JOYCE	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Income Tax)	Respondents

				TRIBUNAL: 	CHARLES HELLIER (Judge)

Sitting in public in London on 14 and 15 September 2009

Jolyon Maughan and Mr M Ripley, instructed by Howarth Clark Whitehill LLP, for the Appellants

Ingrid Simler QC, instructed by the Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	These appeals relate to payments made by Kuehne + Nagel Drinks Logistics Ltd (“KNDL”) to certain employees in connection with their transfer of employment from Scottish & Newcastle UK Limited (“S&N”) to KNDL.  Mr Stott and Mr Joyce were two of those employees.
2.	HMRC amended the self assessment returns of Mr Stott and Mr Joyce on the basis that the payments they received were earnings from employment, and decided that KNDL was liable to pay National Insurance Contributions (NICs) on these payments.
3.	Mr Stott and Mr Joyce appeal against the amendments to their self assessment returns and KNDL appeals against the notice of the decision in respect of the NICs.
Summary
4.	In 2006 S&N transferred its drinks distribution business to KNDL, a company which was the vehicle for a distribution business joint venture between S&N and Kuehne & Nagel.  The transfer of the business was a relevant transfer for the purpose of the Transfer of Undertakings (Protection of Employment) Regulations 2006, (TUPE).  The effect of TUPE was that, with certain exceptions, the 2,000 transferring employees of the distribution business would acquire rights against KNDL which were the same as those they had before the transfer against S&N.  One of those exceptions was in relation to the future accrual of pension rights.  During the consultations with the union and others prior to the transfer it became apparent that the employees were seriously concerned because they considered that the KNDL pension scheme was not as generous as the S&N scheme.  Industrial action was considered.  Eventually it was agreed that payments of £3,000 (immediately) and £2,000 (a year later) would be made to the transferring employees.  The payments were agreed and the transfer went ahead smoothly in July 2006.  The payments were made.
5.	The payments are liable to income tax if they are “emoluments from” employment, and KNDL is liable to pay NICs if they are “remuneration or profit derived from an employment”.
The Evidence
6.	I heard oral evidence from (i) Andrew John Swift, a drayman driver in the distribution business and a shop steward for the T&GWU.  Mr Swift was a member of the Employee Council and had taken part in the meetings of the TUPE consultation group, and (ii) Andrew Ivel, who at the time of the transfer of the distribution business was Employee Relations manager for S&N and had taken part in the TUPE consultation meetings.  At those meetings Mr Ivel had led for S&N the negotiation which resulted in the payments to the transferring employees.  Both Mr Swift and Mr Ivel provided written statements.  Unless expressly noted below where I set out Mr Smith’s or Mr Ivel’s evidence I accept it.  There was also a short statement of agreed facts and two bundles of copy documents which included minutes of the Employee Council and TUPE meetings.
Findings of Fact
(i)	The corporate structure and the transfer scheme
7.	S&N’s distribution division delivered drinks to the ‘on trade’: pubs and other similar establishments.  The on trade was declining and the division was dependent on a small number of big customers.  The distribution business was seen by S&N as not part of its core business and was costly.  The remuneration it provided to its employees in that business was better than that provided by other operators in the same sector.
8.	Between 2003 and 2006 S&N had negotiations with several large distributors with a view to a joint venture arrangement which would encompass its distribution business.  In early 2006 it reached agreement with Kuehne & Nagel (KN) for a joint venture company.  S&N and KN would each hold 50% of the equity of a joint venture holding company.  That company would have a service agreement with a 100% subsidiary of KN, KNDL, to which S&N’s distribution business would be transferred.  KN had within its group a large existing distribution business.  Economies were expected following the transfer, and stability and growth were hoped for as a result of KN’s name and expertise.
9.	The transfer, for reasons I shall return to, fell within the TUPE regulations.  These required consultation about the transfer with employees and their representatives. The agreement for the transfer was disclosed, at first in confidence, to S&N’s Employee Council. Later, after the deal had been announced, there were more public consultations.
(ii)	The consultation meetings and the genesis of the payments
10.	I turn first to the minutes of and documentation for the consultation meetings held in relation to the proposal.  Those show the following story which was reflected in the evidence of Mr Ivel and Mr Smith:-
11.	The first consultation on the transfer scheme was at the Employee Council meeting of 30 March 2006. The scheme was not greeted with acclamation: there was unhappiness that it had been presented on a fait accompli and concern was expressed about pension schemes, share schemes and other changes to employees’ conditions of service.
12.	By 12 May 2006 the pension issue had become the main concern at the consultation meetings.  John Jordan from the T&GWU led the union representatives.  At a meeting on 16 May he indicated that most other issues could be ironed out but the major issue was pensions.  He was disappointed that a defined benefit scheme was not to be offered by KNDL and said that the union would ballot members on industrial action.  The minutes of a shop stewards’ meeting on 24 May 2006 indicates that the “big issue” was with pensions.
13.	Pensions were the focus of a meeting on 1 June 2006.  John McDougal from Kuehne & Nagel expressed the concern that industrial action could damage the new business.  Mr Ivel then said that they were “willing to negotiate an amount of money which will bridge the gap by giving individuals an opportunity to invest a lump sum in pension arrangements”.  He raised the question of whether the payment should be the same for all employees.  The union side responded that they wished it to be the same for everyone.  Mr Ivel’s first offer was for £1,000 per person.  This was rejected.  Mr Smith put forward a proposal of £6,000 per employee “to do with as they think fit.”
14.	At a meeting on 8 June there was further discussion about pensions and about whether the lump sum could be applied to the existing S&N plan to enhance benefits.  An offer of £2,000 was made by S&N.  
15.	Mr Jordan indicated that the union was willing to recommend a £5,000 payment.  That would avoid industrial action. Mr Ivel rejected that offer. At one stage Mr Jordan is recorded as saying:-
“We have been fair, we think £5,000 is scant compensation for taking away our defined benefit scheme.  The £5,000 is our second option.”
He said the union would complete a ballot for industrial action by the end of the following week.  He is recorded as saying “I sincerely hope that our recommendation for a ballot on industrial action is backed and we get that mandate … so we will then see how good K&N are when poor service kicks in and [customers] go elsewhere.”
16.	At a meeting on 20 June it was reported that a consultation ballot on the £2,000 offer rejected that offer almost unanimously (1189 out of 1206 were against accepting the offer).  Plans were afoot for a postal ballot on potential industrial action.  Mr David Coulson from S&N expressed concern about the damaging effect industrial action would have on the business: everyone’s livelihoods depended upon the business being successful.  Then Mr Ivel, recognising the need to ensure the new venture had a clean start, said that S&N were prepared to make a total payment of £5,000 in two stages.  The payment would be directly to a pension scheme.  £200 of the £5,000 represented the loss of the beer allowance (see para 18 below); the remainder related to pension rights.  He said the payment was “on the basis of your commitment to work together and making the new company a success for you all.” Mr Jordan’s response was that it would be preferable if a payment of £5,000 was made to all employees to do with it as they wished.  Apparently accepting this, Mr Ivel then indicated that the payment would be pro rata for part-timers, and paid £3,000 in July 2006 and £2,000 in April 2007.  If an employee left as a ‘good leaver’ before April 2007 he would remain entitled to the £2,000 sum but not otherwise.  These terms were accepted by the union side with no recorded discussion.
17.	The final terms of the payments were these:-
(i)	the payments were to be made to eligible employees who transferred to KNDL;
(ii)	eligible employees were permanent employees and short term contract employees who were members of the S&N pension scheme on 1 June; 
(iii)	the payments were £3,000 in August 2006 and £2,000 in April 2007.  These amounts were pro-rated for part-time employees;
(iv)	Employees who left before April 2007 would receive the second payment on leaving provided they were “good leavers” – i.e. their departure was occasioned by retirement, ill health or redundancy;
(v)	employees could choose either to take the sums in cash or elect for the sum to be contributed to an S&N or the KNDL pension scheme.

A ballot was held in which 71% of those participating voted in favour of these proposals.

18.	One of the minor issues which had arisen in the consultation was that S&N employees were entitled to a beer allowance.  KNDL, since it was not a drinks manufacturer, could not provide the same facility.  It was agreed that some payment would be made in recognition of the fact that the beer allowance would no longer be available after the transfer.  The payments described above were said to include compensation in relation to the loss of the beer allowance.  There were a few employees who were not members of the pension scheme.  They received only the £200 beer allowance payment.

19.	The payments were to be made after the transfer to KNDL and it was agreed between S&N and KNDL that they would be paid by KNDL but that S&N would reimburse KNDL for the full cost of the payments (other than the element reflecting the beer allowance which was dealt with separately).

20.	I now turn to the additional facts I drew from the evidence of the witnesses.

21.	In September 2005 (when, it will be remembered, S&N was engaged in overtures to possible joint venture partners) S&N had announced a review of the pension arrangements.  At that time it operated a non-contributory final salary scheme for all its employees.  S&N wished to reduce the cost of operating this scheme.  It consulted with the Employee Council.  Following the consultation the company had announced changes to its pension arrangements.  They would not be as advantageous as before.  Employees were given the choice of (i) remaining in the final salary scheme but paying 6% of their pay into the scheme, and (2) transferring to a career average defined benefit scheme with different benefits depending on the level of extra contribution paid by the employee.

22.	Mr Smith had participated in the consultation over the pensions review.  He had been the chairman of the pensions committee.  He thought the result could have been a lot worse and was pleased that they had managed to retain a defined benefit scheme.

23.	When Mr Smith and other members of the Employee Council were told of the KNDL transfer scheme they were upset.  They were upset that the KN negotiations had been taking place while they had been discussing the changes to the S&N pension scheme, the participation in which would be put at risk by the transfer. They were concerned about their new employer.  Mr Smith explained to his colleagues that there was nothing they could do to resist a TUPE transfer but that it was a bad thing for pension rights since he knew that the pension arrangements would not necessarily transfer.  

24.	Mr Smith said that at the first TUPE consultation meeting it was clear that the pension scheme, and also the beer allowance and the S&N share schemes were not going to be replaced.  Concern was expressed about the pension scheme in particular.

25.	Further information was provided at later meetings on the pension scheme to be provided by KNDL. It was not a defined benefit scheme.  It was regarded on inferior to the S&N scheme. There was a feeling on the employee side that much of the savings expected by S&N from the joint venture would come from the reduced cost of the pension benefits (although Mr Ivel’s evidence was that those savings represented 15% or so of the total).  KN made it quite clear at the meetings that a defined benefit pension would not be provided.  The unions made sure that their members understood the issue. Estimates were made of the financial loss employees could suffer.  

26.	Mr Smith told me that the on-trade distribution business required the expertise and experience of its employees to operate.  It could not easily have been taken on immediately by new employees.  Therefore the attitude of the transferred employees could affect whether or not it was a success.

27.	He told me that strike action was undertaken very infrequently and not lightly.  It was known to be damaging to employee and employer.  No one ever won.  But the employees felt very strongly.  They had bargaining power because they could go on strike, but they recognised that a strike would damage all of them.

28.	Mr Smith told me that it had been decided to ask for an equal payment to all because it would have been difficult fairly to set a formula reflecting the differences in employers’ positions.  Also they needed to move on and resolve the issue.

29.	Mr Ivel confirmed that it was crucial for the new joint venture to hit the ground running, and that the more highly engaged the employees were, the more successful it was thought the venture would be.  Industrial action (and also its aftermath, I inferred) would interfere with that.  It was in the employer’s interests to avoid a dispute and have a smooth transition.  The increase in the payment from £1,000 to £5,000 was necessary in his view to avoid individual action over the loss of pension rights.  It was “worth paying the £5,000 to compensate the workers for the loss of pension rights so as to secure that they co-operated with the joint venture.”  S&N had in any event planned for some payment.
30.	Mr Ivel also said that both he and S&N management felt rather guilty about the effect of the transfer on employees’ pension rights in the circumstances.  It did not appear to me however that such guilt would on its own have given birth to this payment.  The guilt may have eased the lock but the key needed to make it turn was the threat of industrial action.

31.	Mr Ivel said that the bad leaver provision was a way for the company to make some savings, and reflected S&N’s normal practice.  It was likely that some employees might retire early after transfer and he thought it fair that they should receive the whole payment: hence the good leaver provision.  There was not much discussion about this provision at the meetings.  It was not of great importance.

32.	Mr Ivel said that it was not expected that transferring employees would leave KNDL in large numbers.  They were paid at higher than market rates.  In fact, he said, that meant that a high turnover of staff would have benefitted the new company.  

33.	I concluded from this that encouraging employees to remain with KNDL in the longer term was not a motive of making the payments, but it was clearly necessary that KNDL would start life with an adequate work force and clearly desirable that they should be motivated and not surly.

Summary : reasons for the payments

34.	It was clear to me from the documentary history I have summarised above and from the evidence of Mr Ivel and Mr Smith that:-

(i)	the genesis of the payment lay in the concern which the employees (through their representatives) had that they would lose the benefit of a defined benefit pension scheme on transfer;
(ii)	the payments were made, both from the employers’ and the employers’ perspective, as compensation for that change in pension scheme;
(iii)	the payments were made because, had they not been made, it was likely that industrial action would have followed;
(iv)	industrial action would have been damaging to the business of KNDL;
(v)	avoiding industrial action enabled a smooth transition to the new venture and such a transition was sought both by employees and employers.

35.	To my mind it cannot be said either from the employees’ or employers’ perspective that the only reason the payments was made was either solely in compensation for the pension changes, or solely in order to achieve a smooth transfer (i.e. avoiding industrial action and having employees working willingly in the new venture).  Both these reasons were bound together: I did not pay for my house just because I was obliged to under the purchase contract or just because I liked it.  It can no more be said that the employers did not make the payment to compensate the employees than it can be said that the employees did not take the payment for not disrupting the transfer by taking industrial action.  I conclude that the payments were made and received both (i) in order to compensate for loss of pension expectations and (ii) to ensure a “smooth transfer”, and that such was the understanding of all parties.

36.	Whilst it is clear to me that one of the reasons for making the payments was to ensure a smooth transfer with employees who were not disgruntled, I did not conclude that they were made with the intention of persuading employers to remain long term employees of the joint venture or even employees of the joint venture for a year.  I reached that conclusion:-

(1)	despite the bad leaver provision in the terms of the payments: it was clear that that provision had been tucked on to the end of a horse trade negotiation mainly with the idea of saving money; 
(2)	because of Mr Ivel’s evidence that the levels of pay were above market levels so that it was not expected that employees would have left to go elsewhere in large numbers; and
(3)	because of Mr Ivel’s evidence that it would be quite advantageous if some employees did leave.

37.	There was some debate before me about the pro rata provision in the payment terms – as to whether it reflected future or past efforts of the employee or greater or lesser loss of expectation of pension benefit.  I was not convinced that the negotiation of the payment terms was that academic.  The minutes of the meetings and the evidence of Mr Ivel and Mr Smith indicated to me that little thought was given to such issues and that the terms agreed were not the result of the application of a guiding principle which could later be detected from the detail of the payments.  To my mind the pro-ration and bad leaver provisions were simply opportunistic money saving devices slid into the deal by the employer in a form which would not excite much opposition.  The reason they were proposed in the form they were was to save money in a not unreasonable way.  They do not provide any insight into the reasons for, on the nature of, the payments.  

38.	A larger issue arises over the fact that the payment was the same for all full time employees.  The loss of expectation of future pension accrued benefits differed greatly between members of the work force.  It was greater for those who, before the transfer, had had longer expected future employment with S&N or higher salaries; it was less for those who were closer to retirement or otherwise to leaving S&N’s employment or who had lower salaries.  The fixed sum did not reflect the varying values of loss of expectation.  Mr Smith’s explanation of the union decision to ask for a fixed payment made sense however.  It would be difficult to invent a model (or formula) which took account of age, career expectations, the possibility of future changes to the S&N scheme and even life expectancy.  Once one stepped onto that slope one would spend a long time in negotiating.  And this was clearly an issue to be resolved quickly.  As a result I conclude that there was no reason behind the failure to pay a variable sum which sheds any light on what the payments were made for, because the only such reason was expediency.

39.	The only detail of the arrangement which in my view is significant is that the money (apart from the beer money payment) was to be paid only to transferring employees who were members of the S&N scheme 

The TUPE Provisions

40.	Council Directive 2001/EC relates to the safeguarding of employee rights on the transfer of undertakings.  The third recital states:

“It is necessary to provide for the protection of employees in the event of a change of employer, in particular, to ensure their rights are safeguarded.”

Other recitals refer to procedures for collective redundancies, information consultation, participation and the Social Charter.

41.	Article 3(1) of the Directive provides that:

“The transferor’s rights and obligations arising from a contract of employment… existing on the date of a transfer shall by reason of such transfer be transferred to the transferee.

“Member States may provide that, after the date of the transfer, the transferor and the transferee shall be jointly and severally liable in respect of obligations which arose before the date of the transfer from a contract of employment or employment relationship existing on the date of the transfer.”

42.	Section 2(2) of the European Communities Act 1972 (ECA) permits regulations to be made:

(a)	for the purpose of implementing Community obligations or 
(b)	“for the purpose of dealing with matters arising out of or related to any such obligations or rights …”

Section 38(2) of the Employment Relations Act 1999 (ERA) applies where regulations are made implementing a community obligation relating to the treatment of employers on a transfer of undertaking, and provides that the regulations may be made which:
“make the same or similar provision in relation to employees in circumstances other than those to which the Community obligation applies.”

43.	The TUPE regulations are made under section 2(2) ECA and 3A ERA.  They apply to the transfer of an undertaking by one person to another where there is a transfer of an economic entity. Regulation 4 of those regulations provides that, except when an employee objects to being transferred (in which case the transfer operates as a termination of his contract without dismissal):
“(1)	a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor … but any such contract shall have effect after transfer as if originally made between the person so employed and the transferee.”

and,	“(2)	… all the transferor’s rights powers duties and liabilities under or in connection with any such contract shall be transferred by virtue of this regulation to the transferee.”

Regulation 10 provides that those provisions shall not apply to an occupational pension scheme, and that no employment law claim may be brought for the loss of rights under such a scheme as a result of the transfer.

44.	Those regulations were the legal background to the transfer of the distribution undertaking of S&N to KNDL.  Once the business was transferred to KNDL the employees had little choice: their contracts of employment were automatically transferred to KNDL unless they objected. But if they objected their employment terminated without compensatory rights.  So generally they had to transfer.  On transfer they kept almost all their previously accrued rights apart from their rights to accrue extra pension under the S&N scheme.

45.	The regulations also raise another issue which was debated before me: that is whether they have any effect in relation to, or in relation to the operation of, ITEPA.  In other words: for the purposes of ITEPA is the change of employer to be ignored because there was no termination of the contract of employment and after the transfer the employment contract is to be treated as originally made with the transferee (Reg 4)?

46.	In my view the TUPE regulations do not have that effect.  That is for the following reasons:-

(a)	The purpose of the Directive, as displayed by the third recital, is to protect an employee in particular in relation to his rights.  That purpose does not clearly extend to matters of taxation and indeed the whole thrust of the recitals appears to me to relate only to the position of the employee vis à vis his employer.
(b)	Article 3(1) deals only with the transferor’s rights and obligations – vesting them in the transferee.  It does not deal with the rights and obligations of any other person (other than, by implication, the employee).  It does not require the change in employer to be ignored or the employee to be treated for all purposes as having always been employed by the transferee.  It does not seem to me that the purpose of the Directive as evinced in the recitals requires a broader interpretation of its words.
Article 4(1) of the Directive provides that “the transfer of the undertaking … shall not in itself constitute grounds for dismissal by the transferor or transferee.”  It does not require the termination of the employment to be ignored.
(c)	As a result, the obligation incurred by the UK as a result of the Directive is limited (in the context of this appeal) to (i) vesting the transferor’s rights and obligations in the transferee and (ii) providing that the transfer is not grounds for dismissal.
(d)	Any regulation made implementing the directive would therefore be subject to a presumption that that limitation was to be read into its construction.
(e)	Although section 2(2)(b) extends the power to make regulations to matters arising out of or related to the Directive, the language of Regulation 4 displays nothing which evinces any intention to require the deeming to have any effect otherwise than as between the employer and employee.
Regulation 4(2) enacts the requirement of Article 3(1).  It does no more than vest the transferor’s obligation and rights in the transferee.  There is no deeming that the change in employment is to be generally ignored or deeming the employee always to have been employed by the transferor.
Regulation 4(1) appears wider, providing that the transfer shall not operate to terminate the contract of employment and that the contract “have effect after transfer as if originally made [with] the transferee”.  The first part of this provision appears to me to reflect the requirement of Article 4(1) that the transfer itself should not be grounds for dismissal, and should be read in that light not as a general deeming provision but as one limited to the rights and obligations of the employee under the employment relationship.  The second part of the provision might be read as having wider effect but its linkage to the first part by “but”, and its requirement that the contract “have effect” is in terms of the obligations between employer and employee (rather than “be deemed to have been” so made), makes clear that it is limited to an effect upon the rights and obligations between the new employer and the employee.
(f)	In an oft quoted passage, Nourse J in IRC v Metrolands (Property Finance) Ltd [1981] STC 193 at 208 said:
“When considering the extent to which a deeming provision should be applied, the court is bound and entitled to ascertain for what purpose and between what persons the statutory fiction is to be resorted to.  It will not always be clear what those purposes are.”
He then went onto deal with what should be done where it was not clear what the purposes were.  In this case however it is clear what the purposes of Reg 4 are.  They are to ensure the safeguarding of an employee’s rights on the transfer of an undertaking and to enact in UK law the requirements in the Directive in relation to the position between employer and employee.  That purpose does not extend to the analysis of the parties’ relationship for the purpose of ITEPA.  The logical consequences of the deeming provided for by Reg 4 must be limited for the purposes of that regulation.
(g)	Nor do the extension of the regulatory powers by section 38(2) ERA affect that conclusion.  It seems to me that if wider effect (and effect on the operation of tax provision) were possible or intended in pursuance of that power, much wider words would have been needed in the regulations.

As a result I conclude that for the purpose of this decision, in deciding whether the payment came from employment, so far as is relevant I should treat the employees as first employed by S&N and then by KNDL. As a consequence the payment was made in connection with that change of employment.

47.	I am fortified in that conclusion by the decisions of the Court of Appeal in Deg-Deutch v Kushy &Ors [2001] 3 All ER 878 which had regard to the need to carry out a deeming provision to achieve the legislative purpose only, and House of Lords in Powerhouse Retail Ltd v V M Burroughs [2006] UKHL 13.  In that case the question was whether the TUPE regulations meant that a pre-transfer employment had not ended on transfer for the purpose of a limitation provision which prevented claims being brought more than six months after an “employment” terminated.  Their Lordships held that the “employment” was the employment with the transferor despite the relevant TUPE provision. 

The Nature of the Employees’ rights and S&N’s obligations under the S&N Pension Scheme

48.	There was very little evidence before me to illuminate the nature of these rights and obligations.  There was a copy of Mr Stott’s written particulars of employment which indicated that he would “be eligible to join the 1972 Pension Scheme subject to the rules of that scheme” details of which were set out in a booklet “and any subsequent agenda”.  Neither the booklet, nor any subsequent agenda, were before me, I was not shown the instruments constituting the scheme and defining the employees’ rights or interests under it and the employer’s obligations and rights in relation to it.

49.	It was clear however from the 2006 changes to the scheme described above that the scheme was constituted so as to permit changes to those rights and obligations.  There was also evidence that S&N had before 2006 made expensive contributions to top up the fund.  I think it likely that it would have done so because it was obliged under the terms of the scheme or its contracts with its employees so to do.  I also note that the provisions of the Pensions Acts require consultation on notice to be made before certain major changes are made to a pension scheme.  I conclude that it is likely that the effect of the instruments constituting the scheme, the regulatory regime and the contracts between the employees and S&N was that:

(i)	there were trustees who held a fund from which they were obliged to pay pensions as defined by the scheme;
(ii)	the employer had some obligation to the trustees adequately to find the scheme; and
(iii)	a change to the constitution of the scheme to remove or radically alter the future accrual of benefits under the scheme could be effected but only after a period of consultation with trustees and employees.

50.	Thus an employee who was a member of the scheme was likely to have a right while he remained an employee to accrue for, at a minimum, the period necessary for any consultation relating to a change in the scheme, additional future pension value by reason of his continued employment.  The nature of that right was therefore that it would be defeated if the employee left employment, and in particular that it would be immediately extinguished on a TUPE transfer.  A proper examination of the contractual position between S&N and its employees might have revealed limitations on S&N’s ability to change the scheme, but that would simply have increased the extent and value of the right I have described.

51.	There is a difference between the right I have just described and the expectation that an employee might have of the future accrual of pension value.   Such an expectation would not be limited to the minimum additional benefit which an employee could legally enforce; instead it would take into account perceptions by employer and employee of pension as deferred salary, and of the likelihood of any change.  From Mr Smith’s and Mr Ivel’s evidence I gathered that, absent the TUPE transfer, the employees had a lively expectation of future accrual of benefit for a number of years, particularly given the 2006 changes to the scheme.  The effect of the TUPE transfer was thus to extinguish both any legal right and the expectation which the transferring employees had.  The right was not sold or given up or exchanged, but was lawfully extinguished by the TUPE transfer.  The expectation was lost.

The Parties’ Arguments

52.	I set out at the end of this decision the full citations of the authorities referred to hereafter.

53.	Mr Maughan says:

1.	the employee’s right to the future accrual of pension was lost on the transfer;
2.	the payment was made for the loss of that right; the threat of strike action was the means by which the compensatory payment was secured;
3.	the standpoint of the recipient is critical in determining whence the payment came; the employees received it as compensation for the loss of the rights;
4.	one must identify the source of the payment rather than intervening reasons for it: the fact that the payment was made to avoid a strike does not obscure its true character which was compensation for the loss of the right.  The threat of strike action was merely the means by which the payment was secured;
5.	the fact that an employer does not have a legal obligation to make payment in compensation for removing a right does not denature the payment as being compensation for the loss of the right;
6.	it is significant that the payments were made because rights were lost in termination of employment with S&N;
7.	the House of Lords in Tilley v Wales held that a payment in compensation for the loss of pension rights was not taxable as being from employment: “if an individual exchanges his pension right for lump sum, that sum is not taxable under Schedule E”;
8.	the payments were not rewards for past services nor inducements for future service (there was no requirement for the recipient to stay in employment as the good leaver provisions made clear); they were for something else. They were not therefore taxable under Lord Templeman’s test in Shilton v Wilmshurst;
9.	the payments replaced either (i) increased pension income which would have been received in the future, or (ii) payments S&N would have to have made under the pension scheme.  Neither of those was taxable as being “from employment”.  The nature of the payments was to be taken from the nature of the payments they replaced (Lord Woolf in Mairs v Haughey).  They were therefore not taxable as being from employment; 
10.	the payments were in the nature of capital.  In Mairs v Haughey and Tilley v Wales it was said that a capital payment was not taxable as an emolument of employment; and 
11.	Mairs v Haughey was strikingly similar: (a) the payments were ex gratia, paid only to transferring employees, were paid even though the employees did not need an inducement to transfer, were not accurate estimates of loss, and were in recognition of diminution rather than extinction of rights; the rights were “much the largest bone of contention”.

54.	Miss Simler says:

1.	the payment was made for going to work willingly for KNDL – for participating in and ensuring a smooth transition: it came from the employment;
2.	the perspective of the payer is highly relevant in determining the nature of the payments: the employer made it to ensure a smooth transition;
3.	the pension scheme was directly connected with the employment; compensation for its loss would therefore come from the employment;
4.	what was lost was not a right to pension payment but the expectation of future benefit.  Nothing was given up or exchanged for a lump sum.  No damages were paid for breach of contract or statutory obligation;
5.	Tilley v Wales can be distinguished.  There a fixed existing right was given up.  In this appeal there was no right to payments which was given up;
6.	the substitution principle should not be pressed too far (EMI v Caldicott per Chadwick LJ); there was no loss of a right to a pension just a loss of expectation of pension.  And there was also the buying off of a potential dispute.  The payment cannot be seen as being just in substitution for a pension right;
7.	there was no principle that a capital payment was not taxable as an emolument from employment.

Discussion

55.	In the following discussion I consider first the specific arguments raised in relation to (i) TUPE, (ii) the Standpoint (iii) Intervening reasons, (iv) Capital, and (v) the replacement principle. I then turn to my conclusions.

(i)	The relevance of TUPE and the change in employer

56.	In their Statement of Case one argument relied upon by the Appellants was put thus: “payments cannot be from the employment in circumstances where the whole reason the payments are made are that the employment has ceased, and with that cessation, rights are lost.”

57.	For the reasons I set out above in the section on the TUPE Provisions, the effect of these provisions is not in my view to require one to assume for the purposes of ITEPA that the employments did not cease.  I do not therefore believe that this argument maybe rejected on the grounds that there was no cessation.

58.	However I do not believe that the payments came from the cessation of employment.  It is true that without the cessation there would have been no payment but to be a causa sine qua non is not enough to make a payment from employment.  The cessation of employment was the trigger for the payment but they were made because of the loss of pension rights and expectations and to ensure willing work without industrial action.

(ii)	The Standpoint of the recipient?

59.	Mr Maughan cites Viscount Simonds in Hochstrasser v Mayes 38 TC 673 at 706:
“The question is one of substance, not form.  I accept, as I am bound to do, that the test of taxability is whether from the standpoint of the person who receives it the profit accrues to him by virtue of his office: see Reed v Seymour 11 TC 625, and Herbert v McQuade 4 TC 489.”

60.	I am not convinced that in this passage Viscount Simonds was intending to identify the standpoint of the employee as the place from which to view the facts, rather it seems to me that he is indicating that the test is whether the profit “accrues to him by virtue of his office”.  Viscount Simonds cites in Reed v Seymour.   In that case the House of Lords was concerned with whether a benefit match receipt was a non taxable personal gift or taxable remuneration.  In reaching the conclusion that it was the former their Lordships did not rest their conclusions on the standpoint of the recipient. Viscount Cave (at 646) considered relevant, among other factors, that the purpose of the benefit was not to encourage the cricketer’s further exertions but to express the gratitude of his employers and the cricket loving public for what he had done and their appreciation of his personal qualities.   That looks to the payer. Viscount Dunedin agreed with Viscount Care.  Lord Phillimore analysed the Easter offering cases and concluded that they did not compel the conclusion that a solitary gift to an employee was taxable.  He found the benefit payment was not an inducement but a plain non taxable gift.  Lord Carson said nothing about the issue of standpoint.  I conclude that in Hochstrasse Viscount Simonds was not drawing the principle of standpoint from Reed v Seymour, but the principle that the profit must accrue by virtue of the office.

61.	Nor do other parts of Viscount Simonds speech suggest that in the passage quoted he was laying down guidelines as to where to stand to view the facts.  Later on in the same paragraph as that from which the quotation above is taken, he quoted with apparent approval Parker LJ’s contrast between a payment made as a reward for services and one made “out of affection or pity”.  Those later words indicate a view to the standpoint of the payer rather than the recipient.  And I cannot detect in his speech any part of his analysis of the facts or law in which viewing the matter from the standpoint of the recipient is necessary for his conclusions.

62.	Even if Viscount Simonds was expressing an opinion that the test had to be performed from the standpoint of the recipient, that opinion does not appear to be shared by other members of the House.  Lord Radcliffe (at 708) considers the employer’s purpose relevant:

“But there is no reason to suppose that the employer’s purpose in proposing the scheme was to obtain these advantages.  What he wanted was to ease the mind and mitigate the possible distress of an employee … The essential point is that what was paid to him was paid in respect of his personal situation …”

Lord Cohen found that the agreement under which the payment had been made was introduced by the employer,

“as part of a general staff policy to secure a contented staff and to ease the minds of employees compelled to move from one part of the country to another…”

Lord Keith agreed and Lord Denning based his conclusions on the receipt not being a “profit”.

63.	Finally I cannot detect in later cases any requirement for emphasis solely on the standpoint of the employee.  Thus Lord Reid in Laidlaw v Perry 42 TC 351 says (at 363) that “it is clear that a sum given to an employee in the hope or expectation that the gift will produce good service by him in the future is taxable.”, a proposition which to my mind requires the standpoint of the payer to be considered.

64.	In the same case Lord Hodson (at 366) says:

“It is often said that payments such as these must be looked at from the standpoint of the recipients who treated them as Christmas presents.  This is a useful guide in those cases where money is derived not from the employer but from some outside source … but I should have thought that when the payment is made by the employer to the employee it is not irrelevant to look at the intention of the employer who pays the money.”

65.	I conclude that there is no principle that the standpoint of the recipient of the sum is the sole or even the predominant standpoint from which the payment must be viewed; rather it is one viewpoint among many which is relevant in determining whence the payment comes.

(ii)	Identifying the Source of the Payment rather than the intervening reasons for it

66.	Mr Maughan says that intervening reasons for a payment cannot obscure its source.  He cites Richardson v Delaney.  In that case an employee was given notice.  He had a right to 18 months notice and the employer had the right to terminate the contract on short notice if it made a payment in lieu of notice.  Payments during the notice period and any payment in lieu of notice would have been taxable emoluments.  After notice had been given, an agreement was reached under which his employment was immediately terminated and he received a lump sum payment broadly equivalent to the payment in lieu of notice to which he was entitled.  Lloyd J, having found that there was no breach of contract by the employer and that the payment could not therefore be compensation for such breach, held that the payment under the agreement – a variation between the two taxable procedures of working out notice and payment in lieu of notice – could not escape tax.

67.	I do not understand Lloyd J to be saying that the intervening reason – the variation agreement – must be ignored; rather he says that if it had been compensation for breach of contract it would be highly relevant, but since it was not, it gave rise in essence to payments derived from the contract of employment.  It was wholly attributable to the replacement of payments due under the contract.  That to my mind is different from a payment made both because of a loss of rights and to secure willing work from where the payment is not simply a payment replacing rights under a contract and where the “intervening reason” is not simply the variation of contract.  I do not believe that Richardson v Delaney compels me to ignore the other aspect of the reason for the payment in this case.

68.	Mr Maughan also cites Holland (HM Inspector of Taxes) v Geoghegan 48 TC 482 in support of this proposition.  In that case the London Borough of Lambeth’s refuse collectors had been entitled under an agreement with the Borough to benefit from the sale of salvageable items collected during refuse collections.  The right was terminable by the Borough on one month’s notice.  The Borough wanted to start a new container system for collecting refuse which could not operate with the salvage agreement in force.  The Borough gave notice to terminate it and it expired.  The collectors went on strike.  The strike was settled and an agreement made between the Borough and the collectors.  The agreement:

(i)	recited the Borough’s objective to introduce a new system;
(ii)	said that to give effect to that objective the Council intended to compensate the workers for the loss of earnings due to the termination of the salvage agreement by making a payment of £450; and
(iii)	provided for future negotiations on pay and terms.

69.	As a result of the settlement the collectors returned to work.

70.	Foster J considered the authorities relating to whether a payment could be an emolument when the recipient was under no obligation to remain in employment following its receipt.  He found that it could be, “finding comfort in Lord Reid’s comment in Laidlaw v Perry that it was “clear that a sum given to an employee in the hope or expectation that the gift will produce good service by him in future is taxable.”  He quoted Lord Hodson’s remarks cited in the previous section of this decision and then said:-

“I think it is necessary … to look at the motive or purpose of the employer in paying the sum and the character of the sum when received by the employee … the [compensation] payment was made ‘in respect of the loss of salvage rights’ …  He had already lost those rights … I think that the main reason was to secure that the Borough’s employees should cease to strike and return to work while a new agreement was negotiated during which time the Respondent would be entitled only to his salary … I for my part do not think that the benefit arising to the Borough is material : nor do I think that the character of the sum paid when it reaches the hands of the employee is changed even if the trade unions do give up their rights to negotiate for a further salvage agreement.
“In my judgment the main purpose of the Borough was to get the Respondents back to work, and the money when received by him was a form of substituted remuneration for his former rights to share in the proceeds of sale of salvage … the sum of £450 was an emolument of his employment …” [my italics]

71.	I have italicised the words in the first paragraph above for two reasons.  First, because the “benefit arising to the Borough” refers, in my view, to the benefit of a new collection service, not the benefit of getting the employees back to work.  I return to this issue later but it seems to me that Foster J is saying that even though it could be said that the payment’s source was the Borough’s desire for a new collection service, that did not affect whether the source was also the employment.  Second, because Mr Maughan relies upon the indication that the nature of the sum is not changed from being a salvage right because of the giving up of negotiation rights.  He says that indicates that the true source is not affected by intervening reasons.

72.	I agree that Foster J is saying that the factors which determine the characterisation of the payment for income tax purposes are not to be treated as dominated by the giving up of negotiation rights.  But to my mind he is not saying that one must go back only to the rights lost in determining the source of the payment : clearly he regards the purpose of the Borough in getting the collectors back to work as a factor of equal relevance to the payment being substituted future remuneration: that was, in Mr Maughan’s terminology, and intervening reason.

(iv)	Capital?

73.	Freed from all authority I would conclude that whether or not a sum is capital in nature is not directly relevant to whether or not it is taxable as employment income.  By section 62(2) ITEPA ‘earnings’ means,

(i)	any salary, wage or fee
(ii)	any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth
(iii)	anything else that constitutes an emolument of the employment;

and by section 9(2) the amount charged in the case of such earnings is the net taxable amount of those earnings.

74.	The characteristics which make a sum capital rather than income are generally lack of recurrence and that it derives from some right or asset which is held as an investment or owned or enjoyed for a longer period.

75.	Whilst it seems possible that the characteristics of a payment which make it capital may also mean that the payment is not a salary or a wage or vice versa, it does not seem to me that simply being capital in nature necessarily prevents a sum from being a fee, a gratuity or a profit.  Thus consideration of whether the sum is capital appears to me to be irrelevant.

76.	However, in Reed v Seymour Viscount Dunedin suggested that the benefit payment was not taxable because it was not in the nature of income (see 647); in Hunter v Dewhurst  Lord Warrington held that the sum paid was capital and therefore not profits from the employment, although none of the other members of the Committee rested their conclusion on that basis; and in Tilley v Wales Viscount Simonds said that apart from previous authority he would take the view that a “lump sum to commute a pension is in the nature of a capital payment which is substituted for … sums … which partake of the nature of income” Lord Porter however in that case doubted that much assistance was to be obtained “by making use of the antimony between capital and income”. In Prendergast v Cameron 23 TC 122 the suggestion that a large lump sum was capital and thus not taxable as income was rejected on the basis that the sum was in fact income, thus leaving alive the possibility that a capital sum was not taxable under Schedule E.  Finally, at the end of his speech in Mairs v Haughey Lord Woolf seems to indicate that a payment has to be an income payment before it can be taxable under Schedule E, although this was unnecessary for his decision.

77.	However in Shilton v Wilmshurst and Hamblett v Godfrey single one off lump sum payments were found to be emoluments without consideration as to whether or not they were capital, and Viscount Dunedin’s comment in Reed v Seymour was made after quoting Lord Macnaughton’s reminder that Income Tax was a tax on income.  It seems to me that in the context of the income tax charges now levied by ITEPA on all manner of profits, the context of Viscount Dunedin’s comments is no longer with us: income tax is now a tax on such sums as are declared taxable by the Act whether income or capital.  

78.	Thus it does not seem to me that authority nowadays compels the conclusion that capital receipts should not be taxable as employment income.  I conclude that the nature of a payment as capital or otherwise is irrelevant to its taxability as a fee, a gratuity or a profit under section 62 (or, put another way, that for the purposes of the Act a sum is capital only if it is outwith those things which are made earnings by section 62).

(v)	The Replacement Principle

79.	In Mairs v Haughey employees were entitled to enhanced redundancy scheme (ERS) rights under their contracts with Harland & Wolff. Under a privatisation scheme it was proposed that they transfer to a new company (H&W2).  The new company would then be acquired by a private buyer.  The scheme would not find a private buyer unless the ERS rights were changed and other changes were made to the employees’ terms and conditions.  The loss of the ERS rights was the largest bone of contention in discussion with the unions.  In the end Mr Haughey was offered employment with the new company which he accepted, and at the same time accepted that if he turned up to work after the buyout of H&W2  had been completed, he would then work under new terms which excluded the ERS and would receive an ex gratia sum.  After his transfer to H&W2 (under his old conditions of service) on 8 August 1989, the buyout took place on 21 August. Mr Haughey turned up to work: whereupon Mr Haughey’s terms and conditions changed and he received the ex gratia payment.  It was found that the payment could be divided into amount A which was made for the giving up the loss of the ERS rights, and amount B reflecting changes to other terms and conditions.  The argument in the case concerned whether or not amount A was taxable as an emolument from the employment.

80.	In the House of Lords Lord, Woolf accepted that amount A was not an inducement to become or remain employed with H&W2.  He then found that a redundancy payment was not taxable under Schedule E being a payment made to relieve the employee from the unfortunate consequences of becoming unemployed. He said that it was “inevitable that if a payment is made in substitution for a payment which might, be subject to a contingency, have been payable that the nature of the payment which is made in lieu will be affected by the nature of the payment which might otherwise have been made. There will usually be no legitimate reason for treating the two payments in a different way.”  The payment of amount A derived its character from the nature of the payment it replaced and was not taxable under Schedule E.

81.	Miss Simler says that in this appeal the employees gave up no rights to payments for the lump sum: the payments were not made to buy out contingent rights; as a result one cannot apply Lord Woolf’s reasoning.  Mr Maughan replies that in Hamblett v Godfrey,  Holland v Geogheyhan and Bird v Martland a payment was made in respect of the removal of rights rather than in exchange for them and in each case was analysed by reference to the rights removed.  Here pension rights were removed.

82.	I agree with Mr Maughan to this extent.  If the payment in this appeal were one which could be said to have been made only to recognise the removal of the pension rights then it would have derived its character from the nature of the rights for which it compensated.  Those rights were to the future accrual of additional pensions (with the consequential obligation for the further funding of the pension scheme by S&N) contingently upon the employees’ continued employment during the continuation of the scheme.  It seems to me that the cases Mr Maughan cites show that there should be no difference between the taxation of a sum paid in exchange for the removal of an employer’s direct obligation to pay a pension, and a sum voluntarily paid in recognition of the removal of an employer’s informal voluntary practice of paying a pension or in recognition of an action of the employer which had the effect of extinguishing a right to accrue (and to receive) greater future pension payments.  The payments would derive from the expected pension payment.

83.	Mr Maughan then says that Tilley v Wales is binding authority that a sum paid in lieu of a pension is not taxable, and accordingly that a sum paid in  recognition of the loss of a greater pension would also not be taxable.

84.	Mr Tilley had an absolute right to a 10 year fixed amount pension whenever he left his employer’s service.  He exchanged that right for a lump sum.  Viscount Simonds said that the pension would not have been taxed under the statutory heading of remuneration from an employment but under the statutory heading of ‘pension’.  A sum received in exchange for that pension right could therefore not be taxed as an emolument.

85.	The same dichotomy between the taxation of earnings and pensions is present in ITEPA: pensions are separately described and taxed in Part 9 of that Act.  Accordingly it seems to me that the logic of their Lordships in Tilley v Wales applies in the context of today’s legislation so that, unless specifically brought into tax in Part 9, a sum received simply and solely in exchange for renouncing a pension right is not taxable under Part 2 of ITEPA.

86.	For the reasons above it seems to me that as a consequence a sum paid simply and solely to recognise the removal of a voluntary pension or the removal of an expectation of a pension should be treated in the same way as a sum paid solely in exchange for a vested pension right and therefore not be treated as from employment.

87.	I can see no basis for distinguishing the reasoning of Tilley v Wales if the lump sum in this case could be said to have been paid simply and solely for the loss of the pension rights and not for something else as well.

88.	But in this appeal it seems to me that the payments were not just made for the loss of expectation.  They were not simple ex gratia payments reflecting the fact that something had been taken away.  Instead they were payments also made to secure the future good service of the employees.  If that second reason is enough to make them taxable then, for the reasons which follow, I do not believe that they are saved by the reasoning in Tilley v Wales and Mairs v Haughey.

Conclusions

89.	None of the authorities to which I was referred dealt expressly with a payment which was made for two reasons which were not dissociable.  It seems to me that the question of taxability in this situation is answered by the statutory words.  If it can be said that such a payment comes from the employment then it is taxable even if the payment can also fairly be said also to come from something else or also be made for a second reason.  (I should stress that I am not here addressing a payment made for two dissociable reasons which may properly be divided between the reasons : once so divided the separate parts of such payments could be said to be paid for reason A and not for any other reason.)

90.	In Brumby v Milner Russell LJ giving the judgment of the Court of Appeal quoted (at 608E) with approval Megarry J’s approach where he said that there were not in truth several questions involving the decision into which of several compartments a receipt was to be fitted, but only one question namely whether the receipt had the taxable quality of remuneration i.e. came from the employment.  The House of Lords (which by this time included Lord Russell) did not dissent from the Court of Appeal.

91.	If for example an employer makes a signing on payment to an employee because the employer expects to profit from the engagement of the employee then it can be said that the reason for the payment is the employer’s desire to make a profit; but another reason for the payment is to induce the employee to work.  The payment is taxable because it satisfies the statutory test and comes from the employment even though it also comes from the employer’s desire to profit.  In Shilton v Wilmshurst, Nottingham Forest, Mr Shilton’s employer wanted to raise money.  Nottingham Forest could get that money if Mr Shilton transferred to Southampton.  It agreed to pay Mr Shilton £75,000 if he transferred.  Lord Templeman noted that “Nottingham Forest had a powerful motive” for offering an inducement to Mr Shilton but that did not stop the payment being from the employment.

92.	In two parts of his speech in that case Lord Templeman contrasts an emolument paid as an inducement or reward, and a payment for some other reason.  The terms he uses differ, and if a close textural analysis were applied one might think that in one of the following quotations he was setting out sufficient conditions for a payment not being taxable, and in the other sufficient conditions for it being taxable.  At 91f he says:

“If an emolument is not paid as a reward … or an inducement … but is paid for some other reason, then the emolument is not received ‘from the employment’.”

and at 94g-h:-

“I prefer the simpler view that an emolument arises from the employment if it is provided as a reward or inducement … and not for something else.”,

Being in each case sufficient conditions, rather than necessary ones.  The status of a payment which is both paid as a reward and at the same time for some other reason is not covered by these statements.

93.	Given the factual context of Nottingham Forest’s reason for making the payment I do not believe it is fair to treat either of these statements as requiring as a necessary condition for taxability that the emolument is not also paid for something else.  In each case ‘the other reason’ or ‘something else’ simply refer to the prior cases  where the payment was made for another reason but in the context of an employment relationship (Lord Reid “the answer will be no if it arose from something else” p.363 Laidlaw).  But in all those cases as far as I can ascertain where the payment was made for ‘another reason’ it was not also made as a reward or inducement.  Lord Templeman’s “for some other reason” are in my view words of contrast, not cumulative conditions for his conclusion.

94.	(There is another possibility, and that is that by these statements the judges are saying that by the nature of the words of the statute the payment cannot be said come from two sources: in other words the tribunal must choose.  But I do not detect that approach in any of their statements, and believe it would have been clearly stated.)

95.	In Mairs v Haughey the change in the employees’ terms took place some two weeks after their TUPE transfer to H&W2.  Before the change they had ERS rights. By signing the forms and turning up to work they renounced those rights in return for payment A.  The payment was thus only in return for giving up the rights.  It was not also any form of inducement. That was not a case of a payment made as an inducement to work which was also paid for losing or renouncing rights.  The reasoning is consistent with my approach to the statutory words.

96.	In Tilley v Wales Mr Tilley had a vested fixed right to a fixed set of payments.  He gave that right up for a lump sum.  The payment (once dissected) could only be for the giving up of those rights.  It was not also an inducement to work or to work willingly or not to cease work.  

97.	In Hochstrasser v Mayes the right which gave rise to the payment was not one which arose from the employment but from other considerations.  It was not also paid as a form of inducement.  It was not taxable because it did not arise from the employment, not because it did so arise but also arose from other considerations.

98.	In Hamblett v Godfrey Neil LJ said that Miss Hamblett “received her payment as a recognition of the fact that she had lost certain rights as an employee, and by reason of the further fact that she had elected to remain in her employment at GCHQ.”  (see 726H).  Therefore he said the payment was made for her being and continuing to be an employee at GCHQ.  He concludes that the payment was paid “because of the employment and because of the changes in the conditions of employment and for no other reason” (p727D) (my italics).  In other words there were two reasons (only) for the payment but both reasons meant that the sum derived from employment.

99.	Purchas LJ based his conclusion only on the connection of the rights given up to the employment.  Balcolme LJ adopted Knox J’s reasoning at the High Court.  Knox J had listed among the factors which led him to conclude that the payment was taxable that the payment was received only by employees who chose to continue at GCHQ.  Weighing the factors Knox J found the payment came from employment.

100.	It may be possible to see in Knox J’s (and thus Balcolme LJ’s) approach one which is different from that I set out above: namely that where there are a multiplicity of reasons for a payment, they most be weighed to determine whether the payment is from employment rather than from some competing source (see 714B “Weighing the factors on either side,”).  I do not think however that such was the exercise conducted.  Instead the factual circumstances were weighed in order to determine solely whether the payment came from the employment.  Having concluded it did there was no need to consider whether it also had another source (although there was no other “independent source other than the Crown’s desire to recognise the loss of rights intimately linked with the employment”).

101.	In Laidlaw v Perry Lord Reid (at 363) noted that the distribution of Christmas presents fostered happiness and good relations which the directors thought likely to be good for the employer,  He said (at 364) that that “points to their object being to obtain beneficial results for the company in future.”  Lord Morris said that ‘Though the impulses of generosity and of kindly and seasonal goodwill were not lacking, … there was manifested that kind of gratitude which is ‘a lively sense of future favours’.”  Several reasons for the gifts are thus apparent: because it was Christmas, because of generosity and because of the employment relationship.  And because the last of these reasons was present the gifts were taxable.

102.	As noted above, in Holland v Geoghegan a council withdrew refuse collectors’ salvage rights.  They went on strike.  The strike was settled. Under the settlement the employees received £450.  ‘As a result of the settlement’ the employees returned to work.  The council accrued other advantages as a result of the settlement.  Foster J said (at 488F) that the “main reason [for the payment of £450] was to secure that the Borough’s employees should cease to strike and return to work ….  I … do not think that the [other] benefit arising to the Borough is material”.  The money was received as substituted remuneration for former shares of salvage rights.  It was from the employment.  Again here there were reasons for the payment which were not connected with the employment (the benefit to the Borough of a different salvage system) but they were not material.  The other reasons were enough to say that the payments were for the employment.

103.	In Laidlaw v Perry Lord Reid quoted a passage from the judgment of Upjohn J in Hochstrasser v Mayes which had in that case been quoted with approval by Viscount Simonds:

“Indeed in my judgment, the authorities show that to be a profit arising from an employment the payment must be made in reference to the services of the employee renders by virtue of his office, and must be something of a reward from services past, present or future.”

To my mind that indicates that if those conditions are satisfied, then the payment is an emolument even if there are other reasons for its payment. In this appeal the payment was made to avoid disruption.  It was made and received to secure the continued willing service of the employees: it referred to the employees’ offices and was in the nature of a reward or inducement to work willingly in the future.  I do not agree that the threat of strike action was merely the means by which the payment was secured; it was instead a substantial cause of the payment.

104.	On this basis I conclude that the payment was taxable.  Because it was paid and received as an incentive to work willingly and without industrial action for the joint venture company, it was an emolument from the employment. That it was also paid and received as compensation for the loss of the pension scheme does not affect this conclusion..  It was paid in reference to the services the employees rendered and was in the nature of a reward or inducement for future willing service.

105.	Miss Simler had two fallback arguments if I held against the Respondents on the question of whether the payments were from employment.  I mention them briefly in the following sections, although they are not strictly relevant to this decision.

NICs

106.	Section 3(1) Social Security Contributions and Benefits Act 1992 (SSCBA) provides:-
“In this part of the Act and Parts 11 to V below:-

(a)	“earnings” includes any remuneration or profit derived from an employment; and 
(b)	“earner” shall be construed accordingly.”

Section 6 of SSCBA provides for primary and secondary Class 1l contributions on earnings paid to or for the benefit of an earner.

107.	Miss Simler’s primary argument was that if the payments received by the employees in this case were earnings from an employment for the purposes of section 9(1) ITEPA then they must also be remuneration or profit derived from an employment for the purposes of section 6(1)(a) SSCBA. However she also argued that even if the payments were not “earnings from an employment” they were nevertheless a “profit derived from an employment”.  She says that “derived from” imports a wider test than “from” and is most closely analogous to “by reason of”, an expression which appears in the income tax benefits code.

108.	I was referred to Commissioners of Inland Revenue v Farmers’ Trading Co Ltd 1NZLR 449 in which the New Zealand Court of Appeal discussed the meaning of profits “derived from” a business.  Reference was made to various authorities:

“ ‘derived’ … connotes the source of origin rather than the fund or place from which the income was taken.  It means flowing, springing, emanating from or … arising from or accruing”
“ ‘Derived’ only means ‘obtained’ or ‘got’ or ‘acquired’.”
“Their Lordships attach no special meaning to the word ‘derived’, which they treat as synonymous with arising or accruing’.”

Mr Maughan says that, if anything, ‘derived from’ is more restrictive than ‘from’.  Milk is derived from a cow, but may as properly be said to come from Sainsburys as it may be said to come from a cow.

109.	I fear that in the statutory contexts I can see no difference between a payment being “from” an employment and its being “derived from” an employment.  Each expression asks what the source of the payment is or where it comes from.  It seems to me that wherever judges have used ‘from’ in judgments relating to this issue the words ‘derived from’ could have been substituted without any difference in meaning.  I conclude that the test to be applied for NICs is identical to that relevant to the employment income charge.

Section 394 ITEPA

110.	Miss Simler says that if the payments were not from an employment then they are chargeable to tax under section 394 ITEPA.  Under this provision “relevant benefits under an employer financial retirement benefits scheme” are brought into charge.  By section 393B relevant benefit means “any lump sum, gratuity or other benefit provided … on … or in connection with, any change in the nature of service of an employee”, and an “employer financial retirements benefit scheme” means any scheme for the provision of benefits consisting of or including relevant benefits to employees or future employees.

111.	Miss Simler says that the payments were relevant benefits and that the arrangement under which they were paid was a scheme for their provision.

112.	Mr Maughan says that this argument would set at nought the decision of the House of Lords in Mairs v Haughey.  Similar provisions were in force at the time of that case and yet the payment was found not to be taxable.  But apart from that he says there was not here any “change in the nature of service” of the employees.  That expression he says looks to what the employees do, to how they serve, not to the obligations of the employer.  A change in rates of pay is a change in the conditions of service but not a change in the nature of the employees’ service.

113.	I agree with Mr Maughan that a change in the conditions under which an employee serves need not be a change in the nature of the service of an employee, and that a change in the employer’s obligations as to payment or pensions does not alter the nature of the employee’s service.  That however leaves the question as to whether the change in the employer as a result of the TUPE transfer was a change in the nature of the service since the services were now to be rendered to a new employer and no longer to be provided to the former employer.

114.	It does not however seem to me that the cessation of service to an employer can properly be called a change in the nature of service: that phrase indicates to me that the service will continue but be different in some respect, not that it will cease.  Likewise the commencement of service is not a change in the nature of the service.  Further given that the transfer consisted of such a cessation and commencement I cannot see how their joinder makes what happened a change in the nature of service when separately they are not such.  Thus I conclude that the change in the employer was not a change in the nature of service.  Since on this analysis there was no change in the nature of service, the payment was not made ‘in connection with’ such a change (however broadly these words should be construed) and accordingly that the payment was not a relevant benefit for the purposes of those provisions.

Result

115.	I dismiss the appeals.

116.	The parties’ rights to appeal are set out in the notice which accompanies this decision and to that extent that notice is incorporated into the decision.

CHARLES HELLIER
TRIBUNAL JUDGE
RELEASE DATE: 17 December 2009

Citations of cases referred to:

Bird v Martland [1982] STC 603
Brumby v Milner 51 TC 584
EMI v Caldicott [1999] STC 843
Hamblett v Godfrey 59 TC 694
Hockstrasser v Mayes 38 TC 673
Holland (HM Inspector of Taxes) v Geoghayer 48 TC 482 (1972)
Hunter v Dewhurst (1932) 16 TC 605
Mairs v Haughey 66 TC 273
Prendergast v Cameron 23 TC 122
Reed v Seymour 11 TC 625
Richardson v Delaney [2001] STC 1328
Shilton v Wilmshurst [1991] STC 88
Tilley v Wales [1943] AC 386