[2012] UKFTT 226 (TC)
TC01920
Appeal number:
TC/2011/06101
INCOME
TAX – Appellant leaving employment as senior civil servant in April 2007 –
Payment by former employer made in December 2007 – Whether a payment in consideration
or in consequence of, or otherwise in connection with, the termination of the
Appellant’s employment (ITEPA s.401) – In the circumstances of
the case, no – Whether “earnings” (ITEPA s.62) – In the circumstances of the
case, yes – Appeal dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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PHILIP BOVEY
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE CHRISTOPHER STAKER
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MR NIGEL COLLARD
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Sitting in public in London on 17 February 2012
The Appellant in person
Mr W Kelly, Presenting
Officer, for the Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1. The
Appellant appeals against a closure notice amending his 2007/08 self-assessment
tax return under s.28A(1) and (2) of the Taxes Management Act 1970.
2. The
Appellant was formerly a senior civil servant employed with the Department of
Trade and Industry (“DTI”) which subsequently became the Department of
Business, Innovation and Skills (“BIS”). He retired from that employment on 5
April 2007. In December 2007, some 8 months after his retirement, he received
a payment from the Department of £6,500, from which income tax and National
Insurance contributions were deducted. This amount was declared in his tax
return as an exempt lump sum.
3. The
closure notice appealed against concluded that the payment of £6,500 was
assessable as earnings under s.62 of the Income Tax (Earnings and Pensions) Act
2003 (“ITEPA”). That position is maintained by HMRC in the present appeal.
4. The
position of the Appellant in his dealings with HMRC, and in this appeal, is
that the payment of £6,500 was assessable under s.401 ITEPA as a payment
received in connection with the termination of his employment, and is therefore
tax exempt.
Applicable legislation
5. Part 3 of
ITEPA is entitled “Employment income: earnings and benefits etc treated as
earnings”. Chapter 1 of Part 3 is entitled “Earnings”. Section 62 ITEPA,
which is in Chapter 1 of Part 3, provides in relevant part as follows:
(1) This
section explains what is meant by “earnings” in the employment income Parts.
(2) In
those Parts “earnings”, in relation to an employment, means—
(a)
any salary, wages or fee,
(b)
any gratuity or other profit or incidental benefit of any kind obtained by the
employee if it is money or money's worth, or
(c)
anything else that constitutes an emolument of the employment.
6. Part 6 of
ITEPA is entitled “Employment income: income which is not earnings or
share-related”. Chapter 3 of Part 6 is entitled “Payments and benefits on
termination of employment, etc”. Section 401(1) ITEPA, which is in Chapter 3
of Part 6, relevantly provides as follows:
(1) 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 or civil partner, blood relative, dependant or personal
representatives.
…
(3) This
Chapter does not apply to any payment or other benefit chargeable to income tax
apart from this Chapter.
7. Section
403(1) ITEPA then provides as follows:
(1)
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.
The evidence and submissions of the parties
8. At the
hearing, the Appellant represented himself, and HMRC was represented by Mr
Kelly. The Tribunal had before it a bundle of documents prepared by HMRC, the
case file, and some additional documents produced for the hearing.
9. The
documents in the case include amongst other items the following.
10. There is what appears to be
an extract from Hansard for 2 March 2007, containing a statement from the Prime
Minister concerning the Government’s response to the recommendations contained
in the 29th Report of the Review Body on Senior Salaries. It is
stated here amongst other matters that “The recommendation for bonus awards
is also being accepted, but payment will be delayed until 1 November 2007”.
11. There is a letter dated 31
May 2007 from BIS to the Appellant, headed “2007 PAY AWARD”, which states: “The
Department’s Pay Committee has now made final decisions on 2007 SCS pay, and
I’m now writing to you with the result. I am pleased to say that you have been
awarded a bonus of £6,500 in recognition of your excellent work on company law
reform. The bonus will be paid in November in line with the Government’s
response to the Senior Salaries Review Report”. There is a handwritten
annotation on this letter, stating “Paid Nov 07 [illegible] 3/12/07”.
12. There is the payslip for the
payment of £6,500 made in December 2007, which describes the payment as being
“Special merit bo”.
13. There is a letter from the
Pay and Records Office (the “Cardiff office”) of BIS dated 4 February 2010,
responding to an enquiry from HMRC, stating that the Cardiff office had the
Appellant’s payslip records from 31 October 2004 until his last payslip on 30
April 2007, and confirming that the Appellant had received special merit
bonuses on 30 April 2005, 28 February 2006 and 31 January 2007. The letter
went on to say as follows: “The special merit bonuses are payments awarded
by the individual departments and can widely vary in what they are awarded for,
it is basically down to the discretion of the managers of the departments,
however all special merit bonuses are taxable.” The letter concluded
that “We do not have a record of a payslip with a one off payment of £6500”.
14. HMRC followed up this
enquiry by providing the Cardiff office with a copy of the payslip for the
£6,500 payment. There is a further letter from the Cardiff office dated 7
April 2010, responding to this, stating: “As long as we receive the request
at pay and records and it has been approved by the manager, we do not go back
and request further confirmation. The ‘special merit bonus’ is just a code
that we use to enter these various bonuses on to our systems. I’m afraid as
this goes so far back to 2007, that I do not have information stating exactly
what the bonus was issued for.”
15. There is an exchange of
correspondence (both mail and e-mail) between the Appellant and the human
resources department of BIS (“BIS HR”). On 7 June 2010, BIS HR advised “The
aforementioned bonus payment was due to your performance on company law reform”.
On 22 June 2010, BIS HR advised: “It appears that the payment in question
is your CSS Pay Award, as awarded in accordance with the guidelines supplied by
your department at the time. This award was taxable, and the sum of £1,430 was
deducted as a result”.
16. On 3 July 2010, the
Appellant followed up with an e-mail to BIS HR stating the following: “As I
understand it, the SCS Pay Award arrangements had two elements: an increase (or
not) in basic salary, by reference to top, middle and bottom performance
tranches, and a possible performance bonus. The notification which I received
dated 31 May 2007, a further copy of which you kindly forwarded to me, makes no
mention of salary or tranches. It referred only to a bonus. As I understand
it from the Department’s Annual Report for 2007, only those in the top tranche
and some of those in the middle tranche were eligible for a bonus under the
arrangements. They do not seem to cover the case of someone who was not put in
a tranche at all, and certainly not in the middle or top tranche”. There
are further e-mails to December 2010 in which the Appellant chases up a response
to this enquiry, although the Appellant’s evidence is that no response was ever
provided.
17. The Appellant gave evidence
as follows.
18. Having received the payment
in December 2007, the Appellant was unsure how to treat it when it came to
completing his tax return. He was by then not in employment, and there was no
box in the tax return to put it in. As the deadline for completing the tax
return was approaching, there was no time to call HMRC. He included it in box 9 (“Compensation and lump sum £30,000 exception”) of the “Share schemes and employment
lump sums, compensation and deductions” page of the tax return. He then
subsequently received a tax refund.
19. Subsequently, HMRC got in
touch with him, opening an enquiry into his tax return for the year ended 5
April 2008 and expressing the view that the payment was taxable under s.62
ITEPA. The Appellant asked for a review. In a decision on 27 July 2011, at
the end of the review, HMRC upheld the decision that the sum was taxable under
s.62 ITEPA. The Appellant disagrees with HMRC’s conclusion.
20. The Appellant is not aware
of a bonus ever having been paid in the civil service to a person who had
ceased their employment, or to a person who was in their notice period. HMRC
has no information from DTI/BIS as to the nature of the payment. The Cardiff office has confirmed that they do not know the details. The statement in the
closure notice that “your previous employer has confirmed this payment was
in respect of a special merit bonus” is simply incorrect.
21. Of the three bonuses that
the Cardiff office said that the Appellant had previously received (paragraph
13 above), the two smaller ones were team bonuses, and the largest one was an
individual bonus.
22. The Appellant gave detailed
evidence of the circumstances of his employment, and of his decision to take
early retirement, and of the procedure for the award of bonuses to members of
the senior civil service. The Appellant’s position, as set out in his letter
of 30 May 2010 to BIS HR, is as follows: “I am not aware of anything I
could have done in the period between January and March 2007 to justify a
further award. I does not appear that the award was under that scheme …
Rather, my understanding is that the award was made centrally, that it related
to the circumstances of my leaving employment and that it would not have been
awarded but for the fact of my leaving”. The Appellant referred to the
terms of the 31 May 2007 letter from BIS. He said that if the payment had been
a bonus under the senior civil service pay scheme, the letter would have said
what tranche he was in, and that he had received a pay increase. It would not
have said that the bonus was being paid for a specific reason, but would have
stated more generally that it was for exceeding objectives. The Appellant
submitted that this was not a bonus under the senior civil service pay scheme.
He considered that the appropriate explanation was that it was a one off ex
gratia payment that had been made because he had left his employment, and
that it was appropriately to be considered as falling under s.401 ITEPA.
23. For HMRC, Mr Kelly submitted
as follows. By virtue of s.401(3) ITEPA, Chapter 3 of Part 6 does not apply to
any payment or other benefit chargeable to income tax apart from that Chapter.
The real issue is therefore whether s.62 ITEPA applies to the £6,500 payment,
since, if it does, s.401 by its own terms does not apply. (The Appellant
indicated that he did not dispute this.) The 31 May 2011 letter from BIS stated
expressly that the payment was “a bonus of £6,500 in recognition of your
excellent work on company law reform”. The Appellant wants the Tribunal to
accept that the payment was for something other than what this letter expressly
says it was for. There is no evidence that the letter was connected to the
Appellant’s departure from his employment. Even if the bonus was in respect of
the 2006/07 tax year, it is taxable in 2007/08 as it was paid in 2007/08.
There is nothing to show that it was outside the discretion of the Department to
award such a bonus. It is irrelevant that the payment was not referred to in
the letter confirming termination of the employment. The fact that there was
no custom or practice of making such payments is not a matter on which any
great weight should be placed. Even if the payment was ex gratia, that
would not mean that s.62 ITEPA does not apply as that section expressly applies
also to a “gratuity” (s.62(2)(b)). There is no reason to think it would not
have been paid if the Appellant’s employment had continued. The payment was
made because the Appellant was a former employee of DTI/BIS. It was paid for
his “excellent work on company law reform” and was therefore a reward for his
services in his employment. The terms of ITEPA ss.6, 7, 16 and 18 were also
referred to.
24. In reply, the Appellant
submitted as follows. Although s.62 ITEPA may be very broad, it must have
limitations. Payments by DTI/BIS are subject to public law and must comply
with applicable rules. The rules prescribe the types of payments that can be
made. In the civil service, a Department cannot make a payment just because it
feels like it. This payment could not have been made under the civil service
performance scheme, and therefore was not a performance bonus. Although
s.62(2)(b) refers to a “gratuity”, the expression “gratuity” means for instance
a tip, and does not have the same meaning as “ex gratia”. The Appellant
worked on company law reform for many years, so the statement that the payment
was for this work could be characterised as a kind of gold watch for a person
leaving employment rather than a payment for particular services. The
Appellant received a bonus in January 2007 and did nothing thereafter until he
left in March 2007 that would have justified a further bonus. It was therefore
not a bonus for particular services. It is accepted that the line between s.62
and s.401 is unclear, but this case falls on the s.401 side of the line.
The Tribunal’s findings
25. The Tribunal has considered
the evidence as a whole. Failure to refer to particular items of evidence in
this determination does not mean that they have not been considered.
26. The Tribunal is required to
make findings of fact on the basis of the evidence before it, on a balance of
probabilities.
27. The Tribunal finds that the
31 May 2007 letter from BIS is clear in its terms. It stated that the payment
is the result of the Department’s Pay Committee’s final decision on 2007 SCS
(Senior Civil Service) pay. It stated that the payment is a bonus, in
recognition of excellent work undertaken by the Appellant, and it stated that
the payment would be made in November 2007 in accordance with the Government’s
response to the Senior Salaries Review Report. The fact that the payment was
ultimately made in December 2007 is consistent with this.
28. The Tribunal is not
satisfied on the evidence before it that it was beyond the discretion of the
Department under applicable rules to award such a bonus to the Appellant in his
particular circumstances, given that he had left his employment in April 2007.
The fact that the payment was made is strong evidence that it was within the
discretion of the Department to make it. In any event, even if the Department
did exceed its discretion in awarding a bonus to the Appellant in the
circumstances, the Tribunal is not persuaded that this would affect its tax
treatment when received by the Appellant. The fact is that the Department paid
a bonus to the Appellant, whether or not it was entitled to do so, and the
Appellant received that bonus.
29. On the evidence before it,
the Tribunal finds that the payment was a bonus falling within s.62 ITEPA. It
was common ground that, if that is so, s.401 is inapplicable by virtue of
s.401(3).
30. It follows that the appeal
must be dismissed.
31.
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.
DR CHRISTOPHER STAKER
TRIBUNAL JUDGE
RELEASE DATE: 28 March 2012
