Neutral Citation Number: [2007] EWHC 270 (Ch)
Case No: CH/2006/APP/0500
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 22/02/2007

Before :

MR JUSTICE LIGHTMAN
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Between :

	SCA PACKAGING LIMITED	Appellant	
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	THE COMMISSIONERS
FOR HER MAJESTY’S CUSTOMS & EXCISE	
Respondents	

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Mr Kevin Prosser QC and Mr Clive Sheldon (instructed by Clifford Chance, 10 Upper Bank Street, London E14 5JJ) for the Appellant
Mr Bruce Carr (instructed by Solicitor for Her Majesty’s Revenue & Customs, Somerset House, West Wing, Strand, London WC2R 1LB) for the Respondents

Hearing dates: 1st – 2nd  February 2007
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Judgment
Mr Justice Lightman: 
INTRODUCTION
1.	This is an appeal by the appellant SCA Packaging Limited (“SCA”) against the decision in principle (“the Decision”) of a Special Commissioners Mr Charles Hellier (“the Commissioner”) released on the 23rd May 2006.
2.	The Decision was to the effect that certain payments calculated by reference to unexpired notice periods made by SCA to redundant employees whose contracts of employment incorporated a document entitled “the Memorandum of Agreement for the Protection of Employment and Compensation for Redundancy” (“the Memorandum”) were chargeable to income tax and National Insurance Contributions (“NIC”) as being emoluments from the employees’ employments under Schedule E under section 19 of the Income and Corporation Taxes Act 1988 (“Section 19”).
3.	The Commissioner held (and there is no appeal from his finding) that the contracts of the redundant employees other than office staff incorporated the Memorandum.  The Commissioner also held in relation to Avril Ferrari an office staff member (and again there is no appeal from his finding) that her contract did not incorporate the Memorandum and on that basis that the payment in lieu of notice made to her was not an emolument from her employment under Section 19.  There was no evidence before the Commissioner as to the position of other office staff members.  Their position was left dependent on whether in their particular cases their contracts incorporated the Memorandum.  The material before me would appear to indicate that they did.
FINDINGS OF FACT
4.	The Decision contains a careful and detailed exposition of the relevant facts.  The Commissioner held that on becoming employed by SCA each employee received a written statement of the terms and conditions of his or her employment pursuant to (what is now) section 1 of the Employment Rights Act 1996 (“ERA”) including the following entitlement as to notice:
“You are entitled to receive and are required to give notice of termination of employment in accordance with:
(a) your agreement with [SCA]; or
(b) the provision of [now ERA]; whichever is longer.”
5.	Accordingly the minimum notice period was that laid down in (what is now) section 86 of ERA, namely one week for each year of continuous employment subject to a minimum of one week and a maximum of twelve weeks.  In some cases however (as the Commissioner held) the written statement was more specific as to the exact notice period and, for example, in the case of a Mr Badcock his statement provided that he was entitled to one month’s notice or one week for each year of continuous employment up to a maximum of twelve weeks whichever should be the greater.
6.	In summary the Commissioner held (and this holding is not challenged) that employees had a contractual (and statutory) right to notice of at least one week and up to twelve weeks based on the period of service.
7.	From at least February 1992 onwards SCA and trades unions representing its employees entered into a series of memoranda which for present purposes were in the same terms as the Memorandum.  The Memorandum contains specific provision relating to redundancy which remained the same throughout the relevant period.
8.	The Memorandum makes provisions for employees generally and it also makes distinct provisions for two different classes of employees, namely those who were in SCA’s employment at the 31st December 1991 (referred to as “Existing Employees”) and those who joined SCA after the 31st December 1991 (referred to as “New Employees”).
9.	Clause 5.7 of the Memorandum, which applies to all employees, (so far as material) reads as follows:
“5.7	Redundancy Terms
… When notice is paid in lieu, then the individual’s last day of service will be extended to include the notice period [for the purpose of calculating the number of complete years of service qualifying for redundancy payments].
Notice will be based on 1 week for every year of continuous service up to a maximum of 12 weeks or the individual’s contractual notice period whichever is greater.”
10.	Clause 5.8 of the Memorandum, which applies only to Existing Employees, (so far as material) reads as follows:
“… Redundancy payments will be based on three weeks pay (two plus one) for each complete year of continuous service.  The additional one week’s pay will only be paid in the event of co-operation from employees in achieving an orderly run down of the business and reduction in the number of employees.
… Payment will also be made of any unexpired period of notice as at the date of termination.  Severance pay [i.e. redundancy pay plus notice paid in lieu] will be subject to a maximum of 2 years (104 weeks) pay or the number of weeks to normal retirement date whichever is less.”
11.	Clause 5.9 of the Memorandum (headed “Transitional Arrangements”) provides that, in recognition of the fact that other employees had left SCA on redundancy terms which were more generous in some respects than the terms set out in the Memorandum, SCA is prepared to make ex gratia payments as there set out to Existing Employees made redundant at some point in the future.
12.	Clause 5.10, which applies only to New Employees, reads as follows:
“Redundancy payments will vary according to length of service.  Once the length of service qualification has been met, the higher redundancy entitlement will apply for each year of service.
Less than 5 years Continuous Service
Redundancy payments will be based on two and a half weeks pay for each complete year of service.
5 Years or more Continuous service
Redundancy payments will be based on three weeks pay for each complete year of service.
Severance pay ie redundancy pay plus notice paid in lieu will be subject to a minimum payment of 4 weeks pay ie no one will receive any less than 4 weeks pay on termination.”
13.	Appendix 1 of the Memorandum is headed: “Formula for Calculation of Redundancy where Notice is Worked”.  Various calculations are set out of employees’ entitlement in a series of situations which include situations both where notice is and where it is not worked.
14.	At various times between 1996 and 2001 SCA irrevocably decided to make a number of its employees redundant.  The only question requiring determination was whether the employees should receive the notice to which they were entitled or payment in lieu.  The employees in question were at SCA’s branches at Histon (where redundancies were declared in 1996) Lydbrook (where they were declared in 1999/2000 and 2001/2002) and Edinburgh (where they were declared in 2001).  After discussions with the trade unions concerned, for the orderly run down of the business SCA asked the employees to agree payment in lieu of notice as part of their redundancy packages and stated that the payment in lieu of notice was to be calculated and made in accordance with the provisions of the Memorandum.  The bulk of employees agreed to payment in lieu of notice and payment to them was calculated and made in accordance with the provisions of the Memorandum.  Employees who insisted on their full period of notice were given it.  The issue before the Commissioner was whether the payments in lieu so calculated and paid were emoluments from the employees’ employment for, if they were, SCA should have deducted and accounted for PAYE in respect of them.  By the Decision the Commissioner held that they were such emoluments and accordingly chargeable to income tax and NICs.  SCA appeals from the Decision to the High Court.
THE DECISION
15.	The Commissioner in the Decision reached his decision by the process of reasoning set out below.  (References to paragraphs are to paragraphs of the Decision):
(1) in the case of Existing Employees, the provisions of paragraphs 5.7 – 5.10 of the Memorandum allowed SCA to ask employees to accept a shorter period of notice than that to which they were entitled (paragraph 97(ii)). If an employee accepted, then a right to a payment in lieu would arise under the existing terms of his contract under the terms of the Memorandum which formed part of the terms of his contract.
(2) in the case of New Employees, the amount of the payment in lieu would be set by the terms of the agreement reached under which the individual would accept short notice (paragraph 98);
(3) the effect, in either case, was that whilst the employee agreed to accept a shorter period of notice, the contract of employment remained extant and he became entitled under the terms of that extant but varied contract to a payment in lieu of notice (paragraph 97(iv));
(4) payment under the Memorandum had the character of a contractual entitlement to a fixed sum in lieu of notice as opposed to an entitlement to damages in respect of which an obligation to mitigate would arise (paragraphs 99-101);
(5) under the terms of the Memorandum, if SCA wished and was entitled to terminate the contract of employment on short notice, it was obliged to offer the employee a payment in lieu or, if it was not entitled to terminate, then the Memorandum provided the terms under which the employee was entitled to a payment in lieu of notice in the event that he agreed to short notice (paragraphs 102-103);
(6) the right to payment arose under the terms of the agreement under which the employees agreed to serve, as varied by a later acceptance of short notice (paragraphs 123, 124, 140);
(7) the amended contract of employment delivered both the redundancy payment and the payment in lieu that was paid to the employee (paragraph 141);
(8) the amounts paid to Existing Employees in lieu of notice, were paid in amounts determined by the Memorandum and for agreeing to take short notice (paragraph 146);
(9) but the amount payable in respect of the notice period which had been given up was not a payment for the renunciation of the contract of employment, only part of it – the contract continued in its amended form (paragraph 148);
(10) the source of the payment was not an abrogation of the employee’s rights under the contract but  the change in one of his rights as an employee (paragraphs 149, 151);
(11) the agreement therefore reached in relation to notice amounted to a modification of the contract during its currency as opposed to its termination or abrogation (paragraph 153);
(12) the cessation or termination of the employment comes from the entirely separate and distinct decision of SCA to terminate by reason of redundancy (paragraph 154);
(13) as a consequence, any part of the payment in lieu which derives from the agreement to leave on short notice is “from” the employment (paragraph 155);
(14) no distinction was to be made as between the Existing and New Employees (paragraph 155).
16.	SCA gave notice of appeal challenging the finding by the Commissioner that the payment in lieu of notice was an emolument from employment merely because there was only a modification as opposed to a termination of their contracts or abrogation of their rights.
17.	The Revenue seek to uphold the Decision on the grounds given and on additional grounds rejected by the Commissioner.  Two of the additional grounds go to the construction of the Memorandum.  The first is that the Memorandum conferred on SCA the right to termination of employment without notice on making the payment in lieu calculated in accordance with the Memorandum.  The second is that the Memorandum conferred on employees in the event of agreeing to payment in lieu of notice entitlement to the payment in lieu of notice provided for in the Memorandum.  The third ground relied on is that, if there was no contractual source for the payments, nonetheless the payments were liable to tax as emoluments from employment in particular because SCA made the payment: as a matter of invariable practice without deduction of income tax or NICs; and made no assessment of the employees’ loss.
THE ISSUE OF CONSTRUCTION
18.	The core issue in this case is that of construction of the terms of the employees’ contracts of employment and (most particularly) the construction of the Memorandum.  I have had the benefit of elaborate arguments and plentiful citation of authorities in an endeavour to assist me in determining the tax consequences of various alternative constructions advanced.  Whilst expressing gratitude for counsels’ efforts in this regard, I do not need to consider them until I have reached my conclusion on construction, and then only if the construction reached calls for any such assistance.
19.	I turn first to the basic materials available for the exercise in construction.  The first is the express term of the contract providing that employees are entitled to receive notice as there provided.  The entitlement is expressed as unconditional.  The second is the provision in the Memorandum for the situation where payment is made by SCA to employees in lieu of notice.  In a nutshell the issue raised is the impact of this provision on the express term of the contract and whether the Memorandum by this provision limited or abrogated the right to notice.  
20.	Before I examine the detailed provisions of the Memorandum, I would wish to make one general preliminary observation.  The Memorandum was plainly an agreement designed by the trade unions representing the employees and agreed to by SCA to afford additional protection and compensation to employees in respect of dismissal for redundancy purposes: it cannot sensibly be thought to have had the purpose of derogating from the employees’ existing rights under the express terms of the contract.  If the Memorandum (as contended by the Revenue) conferred on SCA the contractual right to be excused from the obligation to give notice on payment in lieu of notice, it would do exactly that.  An employee may have perfectly good reasons for wishing his contract of employment to continue for the full notice period.  For example it may be of advantage to him on an application for new employment during the notice period to be able to apply as a person in present employment.  A breach of contract by the employer may operate to the advantage of the employee.  If an employee is dismissed without giving him the period of notice to which he is entitled and paid in lieu of notice, the employer is in breach of contract and his breach of contract may not merely expose him to a claim in damages (which may or may not be satisfied by the payment in lieu) but may operate to release the employee from an otherwise binding restraint of trade covenant which under the terms of his contract comes into effect when he ceases to be employed.  I do not think that the construction contended for by the Revenue entitling SCA to dismiss without notice and in consequence depriving the employee of his right to notice and a breach of contract absolving effect on restraint covenants can be tenable.
21.	The Memorandum in clause 5(7) makes two general provisions applicable to all employees.  The first provision is to the effect that, if payment is made in lieu of notice, the notice period to which he is entitled counts as a period of employment for the purposes of qualification for redundancy.  Payment in lieu of notice may occur where SCA unilaterally (and accordingly in breach of contract) pays in lieu of notice and also where SCA pays in lieu of notice by agreement with its employees.  The entitlement of the employee under clause 5.7 to treatment of the notice period as part of his period of service is expressed in perfectly general terms.  There is nothing in the clause to limit its operation to one only of these two alternative scenarios.  In my judgment the clause is apt to cover both scenarios.  I can see no reason why the position of the employee should differ according to the course taken by SCA: certainly the clause affords no basis for any distinction.  It would be surprising if the employee were in a worse position if SCA acted in breach of contract.
22.	The second provision in clause 5.7 specifies the basis on which the notice period is to be calculated.  This provision reinforces the view (if reinforcement were necessary) that on redundancy the employee’s contractual entitlement to notice remains unaffected.
23.	I turn to clause 5.8 which is applicable only to Existing Employees.  The first of the provisions in that clause sets out how their redundancy payments shall be calculated.  The second provision is to the effect that payment will also be made of any unexpired period of notice at the date of termination and that severance pay (i.e. redundancy pay plus notice paid in lieu) will be subject to the maximum there set out.  Again this provision for payment of any unexpired period of notice as at the date of termination is expressed in terms  equally applicable whether notice is given by SCA unilaterally (and accordingly in breach of contract) or by agreement with the employee.  A significant effect of this provision is that in whichever of these two events the employment is terminated, the employee is contractually entitled to payment as a debt of the sum which clause 5.8 requires SCA to pay: there is no occasion for any deduction by way of mitigation of loss if e.g. the employee obtains or could obtain alternative employment during the notice period.
24.	Clause 5.10 provides that New Employees for their first five years of continuous service will be entitled to a slightly lower redundancy payment than Existing Employees but that after five years continuous years service they will be entitled to the same redundancy payment (though not to the ex gratia payments which are confined by clause 5.9 to Existing Employees).  Clause 5.10 then goes on to provide that “redundancy pay plus notice paid in lieu” to which New Employees are entitled will be subject to the minimum there stated.
25.	Clause 5.10 proceeds on the basis that the position of New Employees is exactly the same as that of Existing Employees in respect of “notice paid in lieu”.  New Employees are contractually entitled to notice.  SCA is not entitled to pay in lieu of notice, but if it does so whether unilaterally and accordingly in breach of contract or by agreement with New Employees, the New Employees are entitled as a matter of contract to payment in respect of the notice period.
CONCLUSION
26.	The legal position was that in the case of both Existing and New Employees they were entitled to notice and they were entitled under their contracts (and in particular the Memorandum) if “paid in lieu of notice” to specified payments in lieu of notice whether payment in lieu of notice was agreed by the Employees or not.  The relevant employees did so agree.  SCA, having agreed with the employees that they should be paid in lieu of notice, duly made the payments to the Existing and New Employees of the sums due as debts under their contracts.  There was no variation or discharge of their contracts of employment.  The payments were payments made under and pursuant to the provisions in their contracts of employment from their inception or 1992 (whichever is the later) in circumstances which their contracts expressly contemplated, namely payment in lieu of notice.  An event contemplated and provided for in their contracts occurred triggering the clause in their contracts entitling them to payment and the payment must constitute emoluments from the employees’ employment under Section 19.  No consideration of the legal principles applicable in other situations is called for.
27.	Accordingly, whilst I differ from the Commissioner on construction, I reach the same conclusion and dismiss this appeal.