Squirrell v Revenue and Customs [2005] UKSPC SPC00493 (23 June 2005)

SPC00493
TERMINATION PAYMENT on ceasing employment – taxpayer becoming resident in the US after the payment – whether taxable in the UK – yes – whether UK taxation affected by the US-UK double taxation agreement – no 

THE SPECIAL COMMISSIONERS

PETER JOHN SQUIRRELL	Appellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Special Commissioner: 	DR JOHN F. AVERY JONES CBE

Heard on paper at the Appellant’s request

The Appellant in person

Kamlesh Singal, HM Revenue and Customs Appeals Unit London, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This is an appeal by Mr Peter John Squirrell against the refusal on 14 February 2003 of his claim for exemption from UK tax under the (1975) UK-US double taxation agreement (“the Treaty”) for a termination payment from British Airways of £92,957, determining that £62,957 was taxable in the UK.
2.	The Appellant is now resident in the US and suffers from poor health.  He was offered by the office of the Special Commissioners, if he chose not to be represented, either an appeal by video link or an appeal on paper and he chose the latter.  I directed on 20 December 2004 that the Revenue lodge a statement of case by 28 February 2005, the Appellant respond with his arguments by 31 March 2005, the Revenue reply by 30 April 2005 and the Appellant has a final reply by 31 May 2005.  
3.	The Revenue complied with the Directions but the only response from the Appellant was a letter of 24 April 2005 enclosing a copy of his letter of 2 December 2004 to the Revenue and asking it to be taken into account, and also correcting a statement by the Revenue concerning his pension that has no bearing on this appeal.  The letter of 2 December 2004 makes the point that he has complied with the US reporting requirements and paid tax in the US so that in his view all taxes have been paid for the year.  After the time for making any further reply had expired I considered the papers and decided that, as I had not had the opportunity to ask the parties any questions and I proposed to base my decision on a point that was not fully argued, I would issue my decision in draft in case the parties had any further comments.  As they have both informed me that they do not I now issue my decision.
4.	Miss Singal, for the Revenue, contends that the termination payment is taxable both under internal law (s 148 of the Taxes Act 1988) and under the Treaty, relying on articles 1, 4 and 15 of the Treaty.
5.	I find the following facts:
(1)	The Appellant, who is a UK national, lived and worked in the UK until 17 October 2000 when he left to live in the US where he currently resides in Florida with his wife who is a US citizen.
(2)	He was resident and ordinarily resident in the UK until 17 October 2000 and not resident and not ordinarily resident from the following day.
(3)	He worked for British Airways plc until 31 March 2000.  On 1 April 2000 he received a termination payment, which he described in a letter to the Revenue as a payment in lieu of notice (and which I accept), of £92,957.89, from which UK tax at 23% on £73,752.69 equals £14,481.31 was deducted, leaving £73,752.69.  It is common ground that the £30,000 from which no tax was deducted is exempt from tax in the UK.
(4)	He completed a UK self-assessment tax return for 1999-00 on 5 July 2000 in which he declared the taxable part of the termination payment.  The Revenue’s calculation of tax showed that £34,128.75 was due for the year less tax deducted at source of £23,439, leaving £10,689.75 payable on 31 January 2001, which was amended to £10,554.15 after an enquiry into the return.  This amount arises because tax was deducted at only 23% from the taxable part of the termination payment as it was paid after termination of the employment, and some is his income is liable to tax at 40%.  In a note 30 March 2000 British Airways told him that this tax would arise.
(5)	He did not work in the US during 1999-2000.
(6)	The Appellant’s letter of 2 December 2004 referred to above enclosed an email from “IRS Email Tax Law Assistance,” which I take to be part of the US Internal Revenue Service, stating that:
“Since your wife is a US citizen you and she can also elect to file a joint return.  However if you do so you are treated as a US resident for the entire year and must report your worldwide income for all year.  Chapter 1 of the Publication 519 has details regarding this choice.” 
I accept this as a correct statement of US tax law (excluding the Treaty).  The Appellant states (and I accept) that he made the election to file a joint return with his wife of his income in the US for 2000 (the US tax year being the calendar year) and paid US tax on the termination payment.  Accordingly I find that he was treated as a resident of the US for the whole of 2000.  
6.	I deal first with UK internal law, meaning UK tax law before applying the Treaty.  Section 148 of the Taxes Act 1988 provides:
“(1) Payments and other benefits not otherwise chargeable to tax which are received in connection with—
(a) the termination of a person’s employment, or 
(b) any change in the duties of or emoluments from a person’s employment, 
are chargeable to tax under this section if and to the extent that their amount exceeds £30,000.
…
(3) An amount chargeable to tax under this section is income chargeable under Schedule E for the year of assessment in which the payment or other benefit is received.
The right to receive the payments or other benefits is not itself regarded as a benefit for this purpose.
 (4) For the purposes of this section—
(a) a cash benefit is treated as received— 
(i) when payment is made of or on account of the benefit, or 
(ii) the recipient becomes entitled to require payment of or on account of the benefit; … 
 (5) This section applies—
(a) whether the payment or other benefit is provided by the employer or former employer or by another person, and 
(b) whether or not the payment or other benefit is provided in pursuance of a legal obligation. 
(6) This section has effect subject to Schedule 11, which contains provisions extending, restricting and otherwise supplementing the provisions of this section.”
7.	The termination payment is clearly taxable under this section for the year in which the payment is received (sub-ss (3) and (4)(a)) which was the year 1999-00, during which he was resident and ordinarily resident in the UK.  It was clearly taxable in the UK under internal law.
8.	I turn next to the Treaty and start by considering his residence:
Article 4
(1)   For the purpose of this Convention— 
(a)   the term “resident of the United Kingdom” means— 
(i)   any person, other than a corporation, resident in the United Kingdom for the purposes of United Kingdom tax; but in the case of a partnership, estate, or trust, only to the extent that the income derived by such partnership, estate, or trust is subject to United Kingdom tax as the income of a resident, either in its hands or in the hands of its partners or beneficiaries; and …
 (b)   the term “resident of the United States” means— 
(i)   any person, other than a corporation, resident in the United States for the purposes of United States tax; but in the case of a partnership, estate, or trust, only to the extent that the income derived by such partnership, estate, or trust is subject to United States tax as the income of a resident, either in its hands or in the hands of its partners or beneficiaries; … 
(2)   Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States, then the individual’s tax status shall be determined as follows— 
(a)   the individual shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If the individual has a permanent home available to him in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closest (centre of vital interests); 
 (b)   if the Contracting State in which the individual’s centre of vital interests is located cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has an habitual abode; 
 (c)   if the individual has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national; and 
 (d)   if the individual is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement…”.
9.	On 1 April 2000, the date of receipt of the termination payment, he was resident in the UK for the purposes of UK tax, and also resident in the US for the purposes of US tax.  He was therefore a dual resident on 1 April 2000 but so far as I know no claim has been made in either country to determine his residence status under article 4(2) for the purposes of the Treaty (“Treaty residence”) by going through the tie-breaker provisions in turn.  I am not therefore in a position to determine this but, without knowing his Treaty residence, I cannot apply the Treaty.  However, fortunately, it seems to me that, whatever the determination of his Treaty residence, the result is the same from the UK point of view.  Accordingly I will proceed hypothetically on the basis of his Treaty residence being in either country.  I should also mention article 1(3):
“Notwithstanding any provision of this Convention except paragraph 4 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Fiscal residence) and its nationals as if this Convention had not come into effect.”
Article 1(4) provides that nothing in this paragraph affects the application of inter alia article 23, the double taxation relief provision.
10.	Article 15 of the Treaty provides:
(1)   Subject to the provisions of Articles 18 (Pensions) and 19 (Government service), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 
 (2)   Notwithstanding the provisions of paragraph (1), remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if— 
(a)   the recipient is present in that other State for a period not exceeding in the aggregate 183 days in the tax year concerned; and 
 (b)   the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and 
 (c)   the remuneration is not borne as such by a permanent establishment or a fixed base which the employer has in that other State. 
 (3)   Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment as a member of the regular complement of a ship or aircraft in international traffic may be taxed by the Contracting State of which the employer operating the ship or aircraft is a resident.
Article 3(2) provides:
(2)   As regards the application of this Convention by a Contracting State any term not otherwise defined shall, unless the context otherwise requires and subject to the provisions of Article 25 (Mutual agreement procedure), have the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of this Convention. 
11.	The first issue is whether article 15 applies to the termination payment on the basis that it is “salaries, wages and other similar remuneration …in respect of an employment.”  These are undefined terms and accordingly article 3(2) refers one to their meaning under UK tax law (unless the context otherwise requires).  Although the precise words “salaries, wages and other similar remuneration” are not used in UK tax law, according to the Shorter Oxford English Dictionary the meaning of the word “term” extends to “any word or group of words expressing a notion or conception, or denoting an object of thought; an expression (for something).”  Remuneration in respect of an employment corresponds to income that was at the time taxed under Schedule E.  The termination payment, being a payment in lieu of notice, is the equivalent of remuneration and taxed under Schedule E is a similar way to remuneration (although with an exemption for £30,000), and so I consider that the termination payment is within article 15.  I cannot think of any reason why the context might otherwise require.
12.	I next apply article 15 on the assumption that the Appellant’s Treaty residence is in the UK (which seems more probable, particularly if Treaty residence has to be determined separately for periods before and after 17 October 2000 as suggested in paragraph 10 of the Commentary to article 4 of the OECD Model, although I notice that this was added in 1995 after the Treaty was made).  On that basis: 
“…salaries, wages and other similar remuneration derived by a [Treaty] resident of [the UK] in respect of an employment shall be taxable only in that State unless the employment is exercised in the [US].” 
The termination payment is accordingly taxable only in the UK unless the employment is exercised in the US, which I have found as a fact that it was not.
13.	Alternatively I apply article 15 on the assumption that his Treaty residence is in the US.  On that basis:
“…salaries, wages and other similar remuneration derived by a [Treaty] resident of [the US] in respect of an employment shall be taxable only in that State unless the employment is exercised in [the UK]. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in [the UK].” 
The employment was exercised in the UK and therefore so much as is derived from such exercise, which is the whole, may be taxed in the UK, in which case article 23 provides that the US gives credit for the UK tax.  Article 15(2) might make the termination payment taxable only in the US but that applies only if first, the Appellant was in the UK for a period not exceeding 183 days in the tax year concerned, which is the UK tax year 1999-00 during which there is no evidence that he was there for less that that period, and secondly, if his employer was not a UK resident, which it is (paragraph (c) is inapplicable).  Accordingly article 15(2) has no application and the termination payment may be taxed in the UK.  It is possible that article 15(3) applies to achieve the same result but this was not argued.
14.	Thus on either assumption of his Treaty residence the termination payment is taxable in the UK.  The only difference that Treaty residence makes is that the termination payment is exempt in the US if his Treaty residence on 1 April 2000 was in the UK; or that it is also taxable in the US but with credit for the UK tax if his Treaty residence is in the US.  Since I am concerned only the UK tax I can decide this appeal without making any determination of his Treaty residence.
15.	Accordingly I dismiss the appeal.
16.	By way of postscript and in order to assist the Appellant I suggest that he pursue the remedy for any double taxation in the US, as the UK Revenue have correctly advised him on numerous occasions in correspondence.  By making this appeal he has applied for Treaty relief in the wrong country.  The email from the IRS no doubt correctly advised him on the effect of US internal law, but unfortunately it did not deal with the possibility of his making a claim to Treaty relief in the US, the first step of which is to have his Treaty residence determined.  It is important to note that the effect of article 1(3) of the Treaty is that the US can tax its residents as determined under article 4 as if the Treaty had not come into effect, and so any taxing right of the US depends on determination of his Treaty residence under that article, which if in favour of the UK means that the US cannot tax, and if in favour of the US means that it must give credit for the UK tax.  He was advised by the UK Revenue to claim credit in the US for the UK tax, which he questioned on the basis that “the tax request from the UK was not due at that time of my USA tax submission so how can I ask for a tax credit in the USA for an amount which was not due by the UK or paid?”  He will have to ascertain the US rules about credit if credit rather than exemption is applicable.  I should also refer the point he made in his letter of 24 April 2005 that his pension was being taxed in the UK.  I see from the papers that on 20 September 2001 the (UK) Centre for Non-Residents sent him the form for claiming exemption from UK tax on the pension under the Treaty.  If it is still being taxed in the UK it must be because he did not complete the form, which he might consider at the same time, since the Treaty gives exemption from UK tax and the US may not give credit for UK tax that he should not have paid.
17.	As a further postcript, Miss Singal’s statement of case mentions that there are two further appeals, which lie to the General Commissioners, against a surcharge for late payment of his 1999-00 balancing payment on the ground that the tax was not due, and an appeal against a Notice issued under s 28A of the Taxes Management Act 1970 in respect of the same year, both of which are inextricably linked to the issue in this appeal.  I hope that in the light of my decision the Appellant will not need to pursue these.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 23 June 2005

SC 3136/04