[2010] UKFTT 215 (TC)

TC00516
Appeal number:  TC/2009/14702
Income tax – Appellant sub-postmaster receiving termination payment on closure of sub-post office – sub-post office business carried on as part of overall partnership retail shop business of Appellant and his wife - tax treatment of termination payment received – whether partnership property -  yes - whether payment “received” wholly by the Appellant or in partnership (equal) shares with his wife for the purposes of s 401 ITEPA – equal shares - whether payment wholly taxable in the hands of the Appellant under s 403 ITEPA – yes – whether payment could be apportioned – on the facts yes, but irrelevant.	

FIRST-TIER TRIBUNAL
TAX
	LAKBIR SINGH UPPAL
	Appellant

-and-

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

TRIBUNAL:	KEVIN POOLE  (TRIBUNAL JUDGE)
IAN PERRY	

Sitting in public in Birmingham on 23 April 2010

Mr T S Patara of T S Patara & Co, accountants for the Appellant
Mrs Cheryl Payne-Dwyer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION
	Introduction
1.	This appeal relates to the tax treatment of a compensation payment of £74,647.21 (“the Termination Payment”) paid by Post Office Limited to the Appellant under the Urban Post Office Closure Scheme (part of the Post Office’s Network Reinvention Programme) on 31 March 2005.  
2.	The Appellant argues that £30,000 of the Termination Payment should be treated as tax-exempt compensation for loss of office (the office of sub-postmaster) and the remainder should be treated as a capital payment to his wife and himself in equal shares in respect of their disposal of the goodwill of their partnership business upon closure of their sub-post office and shop.  
3.	HMRC argue that the whole amount should be taxed (subject to the usual £30,000 exemption) as employment income of the Appellant under s 403 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).
Background and Facts
4.	In early 1997 the Appellant and his wife negotiated for the purchase of the Woodsetton Post Office in Dudley, a small retail outlet which sold stationery, sweets and snacks as well as operating a sub-post office.  They used their own savings, a bank loan and money borrowed from relatives.  No copy of the purchase contract was made available to the Tribunal.  The purchase was completed on or about 6 March 1997.
5.	The Tribunal accepts that from the outset and at all relevant times, the shop (including the sub-post office) was run by the Appellant and his wife in a 50:50 partnership (“the Partnership”).  The Tribunal was not provided with any partnership agreement and it finds that the Partnership was not formally documented but was governed by the terms of the Partnership Act 1890.
6.	The post of sub-postmaster is a personal appointment and cannot be transferred.  It must be filled by an individual.  Even though the business at the shop (including the post office business) was to be carried on by the Appellant and his wife together in partnership, it was therefore necessary for the Appellant or his wife to be formally appointed by the Post Office as sub-postmaster.  The Appellant applied for (and, in due course, obtained) the formal appointment.  The Tribunal is satisfied that this was duly done at or around the time the shop was taken over by the Appellant and his wife.  The appointment process required an interview and training and the Tribunal accepts the Appellant’s evidence that he and his wife attended together for both the interview and the subsequent training.
7.	The Appellant gave evidence that there was “probably” a formal contract in place between him personally and the Post Office in relation to his sub-postmaster role, but he no longer had a copy and no copy of any contract was included in the evidence before the Tribunal.  The Tribunal finds as a fact that the Appellant was the sole holder of the sub-postmaster appointment at all material times; however it also finds that the appointment (and the rights under it) was partnership property of the Partnership under s 20 Partnership Act 1890.
8.	The accounts and tax returns of the Partnership business were prepared on the basis that the payments of remuneration received from the Post Office by the Appellant in respect of his sub-postmaster position were brought into account as receipts of the trade carried on by the Partnership.  They were aggregated with the other receipts and expenses of the business and the overall net profit was then divided 50:50 between the Appellant and his wife.  
9.	It is fair to say that the bulk of the income of the business was the remuneration received from the Post Office – in the year to 31 March 2005, for example, the Post Office remuneration (excluding compensation for the closure) was £32,665 whilst the turnover of the rest of the business was £5,540.  Whether or not this treatment of the Post Office remuneration was strictly correct in law, HMRC made (and make) no objection to it insofar as it relates to ordinary regular remuneration.  It is in line with the treatment which is set out in their manuals, and which they describe as concessionary.
10.	The Tribunal accepts that the business of the Partnership (including the operation of the Post Office counter) was carried on by both the Appellant and his wife.  In doing so, they were interchangeable.  The Appellant accepted however that in formal terms, the Post Office looked to him personally as the officially appointed sub-postmaster.
11.	In a letter dated 16 March 2004 (“the Offer Letter”), Post Office Limited made a conditional offer, addressed to the Appellant personally, to pay what was described in the heading of that letter as a “compensation payment” totalling £70,046.04 if a decision was made, as part of the Urban Post Office Closure Scheme, to close the Post Office branch at the Woodsetton Post Office.  The Offer Letter included the following sections:
“Subject to each of the conditions listed in paragraph 1 above being satisfied, Post Office Ltd offers to pay to you on or about your last day of service the sum of £70,046.04, if a final decision is taken to close your branch.  This sum represents compensation for loss of office, and all Post Office® business must cease upon your last day of service....”
“We have sought the views of the Inland Revenue on the treatment of the compensation received under the Closure Scheme.  The Inland Revenue has confirmed that that part of the total payment which relates to compensation for loss of office will be chargeable to tax under Section 401 Income Tax (Earnings and Pensions) Act 2003 and will attract exemption, up to a maximum £30,000 contained in Sections 403 and 404 of the same Act....”
“The Inland Revenue has also confirmed that that part of the total payment which relates to compensation for loss of office will not fall within the definition of ‘earnings’ in S3(1)(a) Social Security Contributions and Benefits Act 1992 and will not attract a Class 1 NICs liability.”
12.	The Offer Letter required the Appellant’s acceptance by 19 March 2004 by means of the return of a countersigned copy.  The Appellant was not able to recall countersigning and returning a copy of the letter, but did not dispute that he did so and the Tribunal finds as a fact that the termination of the Appellant’s office as sub-postmaster took place on the terms set out in the Offer Letter (subject only to an adjustment to the amount of the payment referred to in it).  The Tribunal accepts the Appellant’s evidence that when he was considering the offer contained in the Offer Letter, he regarded the proposed compensation payment as being in respect of both the loss of his sub-postmaster appointment and the loss of the underlying business.
13.	The consultation and discussion process continued and eventually the Appellant was notified that the Post Office branch at the shop would close on 31 March 2005.  On that day, the shop closed, the Partnership ceased to trade and he received (into his personal bank account because, as he testified, the Partnership’s business account had by then been closed) from the Post Office the sum of £74,647.21 (“the Termination Payment”) in pursuance of the Offer Letter.  It is noted that the figure is slightly greater than the amount originally mentioned in the Offer Letter, and no clear explanation was forthcoming for this discrepancy.  The Tribunal infers that the increase was due to the fact that the basis of calculation of the amount was essentially a multiple of the Appellant’s best year’s earnings from the Post Office and a higher figure for these earnings became available during the intervening period between issue of the Offer Letter and the eventual closure more than a year later.
14.	In the partnership tax return of the Partnership for the tax year ended 5 April 2005 (for which the basis period was the Partnership’s accounting period ended 31 March 2005), a note was included in the “Additional Information” box 3.116 as follows:  
“Post Office closed on 31st March 2005.  Compensation of £70,046 received for loss of office and goodwill.  Fixtures & Fittings scraped [sic]”.  
In addition, £40,046 of the Termination Payment was included as a non-taxable profit (with no specific explanation in the partnership return, but at the hearing of the appeal it was confirmed that this was on the basis that the payment was capital in nature and not revenue).  This figure was included rather than the full £44,647.21 because the Appellant’s accountants (who prepared the return) were working from the Offer Letter and were not aware that the payment eventually made was slightly larger.  The Appellant (who signed the partnership return) did not point out the discrepancy; it is not clear whether he did so deliberately or simply did not notice, but nothing flows from this.
15.	The net trading profits of the Partnership were allocated to the Appellant and his wife in equal shares and reflected in their respective personal tax returns.  Neither the Appellant’s return nor his wife’s contained any reference to a £30,000 tax free compensation payment, and neither personal return contained any reference to a capital gains tax disposal – nor indeed did the partnership return itself (there was no tick in the box against the question “Did the partnership dispose of any chargeable assets?”).  Mr Patara said this was not mentioned because once the capital payment of around £44,000 was split equally between the partners and taper relief and personal annual exemption was applied, there was no capital gains tax liability for either of them to pay.  No computation confirming this assertion was produced, either when the returns were submitted or subsequently right up to the hearing.
16.	On 4 May 2006, HMRC wrote to the Appellant and his wife, notifying them that HMRC were enquiring into certain aspects of the partnership return in relation to the Termination Payment and the non-taxable profit shown in it.  Obviously their personal returns were also to be regarded as “under enquiry” pending the outcome of the enquiry into the partnership return.  
17.	After further correspondence between HMRC and T S Patara & Co, on 7 December 2006 HMRC issued an amendment to the Appellant’s self-assessment for the year ended 5 April 2005.  The effect of the amendment was to include an extra £44,647 in the Appellant’s return under “Pay from all employments”, resulting in an extra income tax liability of £13,509.02 (as part of the increased income fell into the 40% tax band).  This was done on the basis that HMRC regarded the whole payment received by the Appellant as compensation paid to him personally for loss of his office as sub-postmaster.
18.	In preparation for the expected appeal from the Appellant, HMRC wrote to the Post Office on 15 January 2009 asking them to confirm:
“a)	The reason(s) for which the compensation payment was paid.
b)	An analysis showing the “split of the compensation payment into its component parts” as requested in Mr Patara’s letters of 3 July 2006.”
In reply to this letter, HMRC received a letter dated 3 February 2009 from Royal Mail Group plc, which included the statement:
“..as far as Post Office Limited is concerned, the compensation payments were payments for loss of office in their entirety.”
There was no explanation given as to the exact relationship between Royal Mail Group plc and Post Office Limited, but the writer of the Royal Mail letter of 3 February 2009 appears to be the same individual as HMRC had written to in their letter of 15 January 2009.
19.	After further correspondence and an internal review of the decision at HMRC, the Appellant submitted a Notice of Appeal to this Tribunal dated 29 September 2009.
Provisions of ITEPA
20.	S 401(1) ITEPA provided at the relevant time:
“This Chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with – 
(a)	the termination of a person’s employment,
(b)	a change in the duties of a person’s employment, or
(c)	a change in the earnings from a person’s employment,
by the person, or the person’s spouse, blood relative, dependant or personal representatives.”
21.	S 403(1) ITEPA provided as follows:
“The amount of a payment or benefit to which this Chapter applies counts as employment income of the employee or former employee for the relevant tax year if and to the extent that it exceeds the £30,000 threshold.”
22.	S 5 ITEPA provided as follows:
“(1)	The provisions of the employment income Parts that are expressed to apply to employments apply equally to offices, unless otherwise indicated.
(2)	In those provisions as they apply to an office – 
(a)	references to being employed are to being the holder of the office;
(b)	“employee” means the office-holder;
(c)	“employer” means the person under whom the office-holder holds office.
(3)	In the employment income Parts “office” includes in particular any position which has an existence independent of the person who holds it and may be filled by successive holders.”
23.	At first sight, the wording of ss 401 and 403 ITEPA (when interpreted in the light of s 5 ITEPA) seems apt to cover the Termination Payment in this appeal exactly: it was a payment which was received by the Appellant “directly...  in consideration or in consequence of, or otherwise in connection with” the termination of the Appellant’s office as sub-postmaster, and should therefore be chargeable to tax in his hands as employment income to the extent it exceeded £30,000.  Unless this first impression can be displaced on closer analysis, then the whole payment clearly falls to be taxed in the hands of the Appellant under s 403(1) ITEPA (subject to the £30,000 exemption).
Appellant’s Arguments
24.	There were two broad strands to the argument put forward by the Appellant in seeking to persuade the Tribunal that this first impression should be displaced, at least in part.  The Appellant clearly agreed from the outset that the first £30,000 of the Termination Payment should be regarded as falling within s 401 ITEPA.  The argument was about the remaining £44,647.21.
25.	First, he argued that it was possible, indeed appropriate, to apportion the Termination Payment so that the £44,647.21 could receive a different tax treatment from the first £30,000.  His argument here was that:
a.	there was nothing in the Offer Letter or the surrounding circumstances to prevent such an apportionment (and indeed, the inclusion of the words “that part of the total payment which relates to compensation for loss of office” in the Offer Letter necessarily implied that some part of the Termination Payment was apportionable to something other than compensation for loss of office);
b.	as a matter of common sense and commercial reality, the consequence of the termination of the Appellant’s sub-postmaster appointment was the destruction of the entire substratum and goodwill of the Partnership business – without the Post Office branch, the business was not viable (and indeed the shop was closed and the Partnership ceased to trade on the same day that the Post Office branch was closed); accordingly, it was appropriate to recognise that some part of the Termination Payment was effectively compensation for the damage to the business goodwill of the Partnership;
c.	his accountants’ apportionment could not be set aside on the grounds that it was wholly unreasonable or simply because it led to a beneficial overall tax result (Mr Davis of the Appellant’s accountants gave evidence that he had taken the view that a value for goodwill equal to approximately 1.25 years’ normal remuneration from the Post Office was appropriate).
26.	Second, he sought to argue that the correct tax treatment was to regard the Termination Payment as being received for tax purposes by the partners in the Partnership and not by the Appellant personally.  He pointed to the following facts:
a.	HMRC had accepted for many years the inclusion of remuneration from the Post Office as Partnership income in its partnership accounts and tax returns and there was no reason why the Termination Payment should be treated any differently;
b.	the Appellant’s appointment as sub-postmaster and all the rights arising under that appointment were “partnership property” under s 20(1) Partnership Act 1890 and therefore under that section “must be held and applied by the partners exclusively for the purposes of the partnership...”;
c.	the inclusion of all payments (including the Termination Payment) from the Post Office in the Partnership’s accounts was in accordance with generally accepted accounting practice.
27.	The consequence of following these two strands of argument to their logical conclusion would be that:
a.	the Termination Payment should be treated as a receipt of the Partnership, and shared equally between the partners for tax purposes;
b.	£22,323.60 should therefore be allocated to each partner as a capital receipt by that partner, deriving from a disposal (for capital gains tax purposes) of his/her share of the goodwill of the Partnership’s business;
c.	£15,000 should be allocated to each partner as compensation for loss of the sub-postmaster appointment; and
d.	s 403 ITEPA would then operate either:
i.	to exempt each partner from tax on the £15,000 of employment income allocated to that partner, or
ii.	to exempt the Appellant from tax on the total £30,000 payment allocated to him under s 401(1) ITEPA (if s 403(1) deemed the Appellant, as the departing office holder, to be the recipient for tax purposes of the £15,000 share of his wife as well as his own £15,000 share).
It would follow that the tax treatment argued for by the Appellant would then be in line with the basis on which he had already submitted the Partnership’s and his own personal returns.
HMRC arguments
28.	HMRC argued that nothing said on behalf of the Appellant displaced the starting point that the wording of s 401 and 403 ITEPA (when interpreted in the light of s 5 ITEPA) cover the Termination Payment in this appeal exactly, and accordingly the whole Termination Payment (subject to the £30,000 exemption) should be taxed as employment income of the Appellant.
29.	In relation to the question of apportionment (see paragraph 25 above), they argued that:
a.	All the evidence pointed to the Termination Payment being a single indivisible payment to the Appellant, the nature of which was clearly set out in the Offer Letter.  Nothing suggested that it was intended to be capable of apportionment as the Appellant contended.  The reference in the Offer Letter to “that part of the total payment which relates to compensation for loss of office” was easily explained as standard form wording which was intended to cater for situations in which the Offer Letter might include other payments.  The letter dated 3 February 2009 from Royal Mail to HMRC clearly showed that the Post Office regarded the compensation payment as being indivisibly in respect of loss of office.
b.	The order of Peter Smith J on 8 May 2008 in the High Court case of HMRC v Basharat (unreported – ref CH/2007/APP/0761) made it clear that no apportionment of the compensation payment could be made.  All that was produced to the Tribunal for this purpose was a copy of the learned Judge’s order, running to approximately one page.  It seems that in a case bearing similarities to the present appeal, the General Commissioners of Income Tax (Berkshire Division) had stated a case for the High Court, in which the question was:
“Whether, on the facts found and evidence before the Commissioners, they were correct to find that only part of the payment of £94,415.95, made to the Respondent pursuant to the Post Office Urban Network Reinvention Programme Closure Scheme (“the Scheme”), fell within the provisions of section 401 of the Income Tax and Earnings Act 2003[sic]”
After hearing Counsel for HMRC, and in the absence of the Respondent or his representative, Peter Smith J answered this question “No”.
c.	The Termination Payment was clearly made solely to the Appellant and solely in relation to the loss of the sub-postmaster appointment.  It would have been possible to carry on with the remaining part of the Partnership’s business and develop alternative income, notwithstanding the closure of the Post Office branch and therefore it was inappropriate to attribute any part of the Termination Payment to payment for the destruction of the goodwill of the Partnership’s entire business.
30.	As to the question of whether any or all of the Termination Payment could be treated for tax purposes as paid to the Appellant and his wife (as partners in the Partnership) rather than solely to the Appellant (see paragraph 26 above), HMRC argued:
a.	The matter was decided by s 401 and s 403 ITEPA, which made it clear that the whole amount was taxable in the hands of the Appellant;
b.	Whilst HMRC accepted that it had always permitted (and still did permit) Post Office remuneration to be included by concession as part of the trading income in a situation such as the present, this was a matter of concession and it only extended to the normal ongoing remuneration paid by the Post Office.  The strict position remained that all such income was legally taxable as employment income and their concessionary treatment very clearly did not extend to termination payments.
Decision
31.	The Tribunal finds that the Termination Payment was received by the Appellant in his capacity as a partner with his wife in the Partnership.  It was partnership property, to which he and his wife were entitled in equal shares.  As such, for the purposes of s 401 ITEPA, the Tribunal considers that the Appellant can only be regarded as having “received” one half of the payment.  The other half must, in the Tribunal’s view, be regarded as having been “received” by the Appellant’s wife.  
32.	Nonetheless, both halves of the Termination Payment were received “directly in consideration or in consequence of, or otherwise in connection with” the termination of the Appellant’s office as sub-postmaster of the Woodsetton Post Office, and accordingly the part of the payment “received” by the Appellant’s wife must, since she was his spouse (see s 401(1)), be counted as employment income of the Appellant under s 403.  It seems odd that a husband and wife partnership should be treated less favourably in this respect than a partnership comprising non-relations, but the wording of the section is clear.
33.	Since s 401 on its face applies to any payment, irrespective of whether it is revenue or capital in nature in the hands of the recipient, questions of apportionment of the Termination Payment between compensation for loss of office and other compensation are, in the Tribunal’s view, simply irrelevant.  The whole payment falls within s 401 and 403 regardless of any such apportionment.
34.	This disposes of the Appeal.  However, if we are wrong on that point, we find that the Termination Payment could and should, on the facts of this case, have been apportioned as argued for by the Appellant.  In reaching this view, we note the order made in the Basharat case, but since that case was clearly not fully argued before the learned Judge and the question put to him was on its face specific to the facts as found by the General Commissioners (of which no detail was available to us) we are unable to place much weight on that decision, beyond observing that it clearly contemplated that different facts might give rise to a different answer. We also do not find the letter dated 3 February 2009 from Royal Mail Group plc adds anything to the terms of the Offer Letter: we do not consider that the label placed on a payment by one party to it can be determinative of the tax treatment of that payment so far as the other party to it is concerned.
35.	It follows that the Tribunal considers HMRC’s amendment to the Appellant’s self-assessment for the year ended 5 April 2005 to be correct, and accordingly the appeal is dismissed.
36.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE
RELEASE DATE: 13 May 2010