Spc00625

INCOME TAX – monthly payments to a former employee under a permanent health insurance policy taken out by his former employer – whether instalments of a capital sum – held, no – whether qualifying for exemption from income tax under s.329AA ICTA 1988 – held, no – whether payments of a pension taxable under Schedule E – held, yes– appeal dismissed

THE SPECIAL COMMISSIONERS

WILLIAM A. F. MINTO	Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS	Respondents

Special Commissioner:	JOHN WALTERS QC

Sitting in public in London on 23 April 2007

Robert Mackenzie, Counsel, instructed by JJ Company Secretariat, for the Appellant

M. Charnock, HM Inspector of Taxes, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	The Appellant, Mr. Minto, appeals against a notice of assessment for the year 2002/03 and amendments to his self-assessments for the years 2003/04 and 2004/05.  All appeals deal with the same point in dispute, namely, whether certain sums paid to the Appellant by an insurance company were subject to income tax.  There is also a suggestion in the papers before me that the Appellant seeks to make (in connection with the same general point in dispute) an error or mistake claim in respect of the tax years 2001/02 and 2002/03.    There appears, however, to have been no formal appeal in respect of these claims and I therefore say no more about them.  I was invited to consider the appeal for the year 2002/03 only and give a decision in principle.
2.	The Appellant was represented by Mr. Robert Mackenzie of Counsel, and the Commissioners (the Revenue) by Mr. M. Charnock, HM Inspect of Taxes.
The Facts
3.	A document headed “Draft Statement of Agreed Facts” was put before me.  From the submissions of Mr. Mackenzie and Mr. Charnock, I understand that the following facts appearing in the draft statement are agreed and I find accordingly.
4.	The Appellant was an employee of Jones Lang LaSalle Ltd. (JLL) from a deemed commencement date, 1 January 1998, until 15 March 2002, when his employment was terminated by reason of redundancy.  His job title was “City Leasing Director”. He had worked with two predecessor firms, Richard Main & Co. and Jones Lang Wootton, since 1 August 1992, initially as a self-employed partner.
5.	The Appellant, who was born on 16 July 1955, was absent from work, due to ill-health, from September 2000.
6.	From 1 March 2001 until 15 March 2002, the Appellant received £60,000 per annum (less tax).  This amount was made up of (a) £50,000 per annum, permanent health insurance (PHI) benefits received from the Royal & Sun Alliance Insurance Group (RSA), and (b) £10,000 per annum, ex-gratia augmentation provided by JLL.
7.	At the termination of the Appellant’s employment, JLL agreed to transfer the Appellant’s benefit under the PHI policy held by it, so that that benefit should continue and be held in the Appellant’s name.
8.	The Appellant and JLL entered into an agreement dated 15 March 2002 entitled “Compromise Agreement”.  I shall refer to it thus. 
9.	 The Compromise Agreement contained a recital to the effect that the RSA had agreed that on the termination of the Appellant’s employment, the PHI policy held in respect of the Appellant “will transfer to, and be held in, [the Appellant’s] name”.
10.	The Compromise Agreement provided for the termination of the Appellant’s employment on 15 March 2002 and payment up to that date of all salary and contractual benefits.  In addition, under the heading “Compensation”, it provided that JLL would pay to the Appellant £17,885 enhanced redundancy payment and £12,500 compensation payment as compensation for loss of his employment, and also £47,500 “in settlement of [the Appellant’s] prospective personal injury claim related to alleged work related stress” (called “the PI payment”). It was provided that the PI payment would be subject to deduction of basic rate tax prior to payment
11.	The Compensation Agreement provided that the Appellant agreed to accept the compensation payment and the PI payment in full and final settlement of his claims for compensation for unfair dismissal, redundancy and disability discrimination, and his prospective personal injury claim related to alleged work related stress. The Appellant also warranted that the claims so settled amounted to the entirety of the claims which he believed he had against JLL or any associated company or their directors, etc. arising out of or in connection with his employment including its termination.  It confirmed that the Appellant had taken independent legal advice from a named barrister and had raised all issues relevant to his employment and its termination, about which he had a complaint, with the barrister.  The Compensation Agreement stated that the consideration given by JLL was given without any admission of liability.
12.	A copy of JLL’s group income protection plan with the RSA was also in evidence.  It relevantly provided under paragraph 2E, that:
“if a member ceases to be in the employment of the employer during disability, we [i.e. RSA] will (subject to agreement in each case between you, us and the member concerned) continue to make benefit payments as though he or she were still included in the Policy (but excluding any part of the benefit which is described in your Policy Particulars as a ‘supplementary benefit’).  This will be by means of a special continuation policy in the member’s own name, with payments made by us to the member direct.”
13. This envisages that there would be a special continuation policy set up by the RSA in the Appellant’s name, but Mr. Mackenzie, for the Appellant, informed me that this had not in fact been done.
13.	The Appellant signed an RSA document entitled “continuation of benefit”.  It set out that the Appellant would (subject to conditions) continue to be paid PHI benefit by RSA from 16 March 2002 until 16 July 2015 at the rate of £4,375 per month (£52,500 per annum) increasing annually by 5% compound.  The document also contained the Appellant’s acknowledgement that the continuing payment of benefits to him would be subject to tax.  Mr. Mackenzie told me that this document was inappropriate to the circumstances and should not have been given to the Appellant for signature by him.
14.	There is also in my papers a document entitled “Case Overview” written in January 2002 by a Mr. Robert M. Justice, which is advice given to the Appellant regarding the offer of compensation made to him by JLL. In summary, Mr. Justice recommended a “structured settlement”, which he explained as follows.  
“The structure required would be for JLL to fund a separate insured annuity for [the Appellant] that is treated as a capital payment payable on a monthly basis for the same period and to the same proportionate extent as the PHI insurance claim.”
15.	The Appellant gave evidence in the form of a Witness Statement, supplemented by oral evidence.  He said, and I accept, that his work for Richard Main & Co. had been surveyor’s letting work dealing with City leases and other City property matters, but that after the absorption of Richard Main & Co. into Jones Lang Wootton, which later became JLL, and a move to new offices, his work changed very much.  He summarised the change by saying: “in a word, I was required to deal with financial structuring rather than just normal surveyor’s letting work”. His evidence was that this work put a strain on him and his mental health suffered to the extent that he was forced to go on sick leave on 17 September 2000, and he has never returned to work.
16.	The Appellant acknowledged that JLL had treated him extremely well.  While accepting that JLL had not accepted liability for any stress damages suffered by him, he said that the insurance payments which he received were procured by JLL to defray its liability to him for the stress damages he claimed. He said:
“it speaks for itself that no permanent health insurer would issue a payment without any consideration or premium whatsoever unless the employer was able to require it to do so.  Accordingly the consideration was, in my clear understanding, that it settled my claim for stress damages and personal injury against Jones Lang LaSalle.  The policy issued to me by [RSA], subsequently replaced by Canada Life Assurance, was procured by Jones Lang LaSalle for that very reason.”
17.	In oral evidence, which I accept, the Appellant stated that he was still out of work and had nil chances of returning to work.  He said that he thought he should not have signed the “Continuation of Benefit” document and that his mental condition at the time he signed it (30 April 2002) was extremely poor.
18.	Under cross-examination, the Appellant said that in the days leading up to the signing of the Compromise Agreement (on 15 March 2002) he was very distressed, not aware of what day of the week it was, and unable to have any contact with people on a day-to-day basis.  He stated that he signed the “Continuation of Benefit” document without taking legal advice, because he was unaware of its having any significance.
19.	I also received evidence, which I accept, in the form of a Witness Statement, and oral evidence, from Miss Christina Wooderson, Human Resources Manager at JLL.
20.	Miss Wooderson said that she had known the Appellant for some 13 years as a very senior Chartered Surveyor.  She said that JLL had a PHI scheme with RSA, and in the Appellant’s case, when he was unable to work, besides his entitlements, when an employee of JLL who was unable to work, to £50,000 per annum under the PHI scheme, JLL had augmented this by £10,000 per annum on an ex gratia basis.
21.	RSA had formally admitted the Appellant’s disability claim on 20 August 2001.  After that date, it became clear to Miss Wooderson that the Appellant was unlikely to be able to return to work in the foreseeable future, or possibly at all.  At the same time, JLL was undergoing a redundancy programme by reason of a downturn in the market for City office leases in London.  The Appellant was treated as part of the redundancy programme, even though the reason for his ceasing to be employed by JLL from 15 March 2002, was because of his disability.
22.	Miss Wooderson stated: “It is acknowledged and accepted by Jones Lang LaSalle Ltd. that the Appellant had a prospective personal injury claim due to his mental health, and to settle this and his allegation of work-related stress, a lump sum payment of £47,500 was paid to him on 15 March 2002.”
23.	At the same time, as part of the Compromise Agreement, JLL arranged for the admitted claim made on RSA to be made over to the Appellant for him to collect, in view of his mental ill-health.  JLL wished to ensure that by making these arrangements it had no further exposure or liability of any kind to the Appellant.  Miss Wooderson was aware that the benefits under the policy with RSA could be stopped at any time if RSA considered that the Appellant was able to work.  JLL did not wish to have any future responsibility if, for any reason, the policy payments ceased to be made, or were curtailed.  Miss Wooderson therefore arranged that all third party enquiries with regard to the policy and its benefits should be passed to the Appellant as a term of the compromise and settlement of all his potential claims against JLL.
24.	Miss Wooderson instructed the brokers to JLL to arrange the transfer to the Appellant of all rights and benefits under the PHI policy consequential on the claim of JLL thereunder in respect of the Appellant.
25.	Miss Wooderson confirmed in cross-examination that the payment of £47,500  (the PI Payment) made under the Compromise Agreement had been paid by JLL specifically in respect of the Appellant’s prospective personal injury claim.
26.	She stated that as a result of the continuation of benefit arrangement with RSA, the Appellant would be entitled to PHI benefit up to the age of 60 provided he suffered continuing incapacity and that there were no ongoing costs in relation to the provision of that benefit falling on JLL. 
27.	She calculated that payments under the PHI policy to the Appellant until the retirement age of 60 would amount to some £750,000 in total (plus indexation) but she stated that JLL was never liable to damages of that amount against the Appellant.  Also, payments at that level were probably inadequate to compensate the Appellant for the loss of the remuneration which he would have had the potential to earn if he had not been ill.
The issues for determination
28.	At an earlier Directions Hearing in this appeal, Sir Stephen Oliver QC had directed that the issues for determination were:
whether the amounts to which the notices of assessment under appeal relate were properly chargeable under section 19(3) of the Income and Corporation Taxes Act 1988 (ICTA) as a pension, or under section 18(3) ICTA; or
whether, as the Appellant contends, the amounts to which the assessments relate constitute in principle personal injury damages for the purposes of section 329AA ICTA, or otherwise comprise or represent instalments of capital.
The Submissions
29.	Mr. Mackenzie, for the Appellant, submitted that the payments under the PHI policy to the Appellant by the RSA, and later, Canada Life, represent instalments of capital, namely the discharge or liquidation of sums due under a settlement for a potential claim for damages of some £750,000, and referred to Miss Wooderson’s evidence.  He submitted that to determine the correct and essential character of the payments, it is necessary to examine the surrounding circumstances, including the circumstances that gave rise to the payments, as well as their origin and nature.  He said that the intention of the parties is also a factor and that each case must be determined on its own facts.
30.	He cited William John Jones v CIR 7 TC 310 at 315, Dott v Brown [1936] 1 All ER 543, 550, Laird v CIR 14 TC 395, Sothern-Smith v Clancy  24 TC 1, 6, IRC v Ramsay  20 TC 79,  and Zim Properties v Procter [1985] STC 90.   These cases establish a broad principle, relied on by Mr. Mackenzie, that the substance of the transaction must be looked at in each case.  Where an amount, particularly of compensation money, is found to be capital, it will usually (though not always) be where it discharges an antecedent debt.
31.	Mr. Mackenzie’s case was that the monthly payments under the PHI policy to the Appellant were made by the insurance company (the RSA and, later, Canada Life) at the behest of JLL as apart of the settlement of the Appellant’s claim against JLL for stress damages.  He submitted that the origin of the payment was the settlement of the claim and that the payments represented the discharge of a pre-determined capital sum of £750,000.
32.	 Mr. Mackenzie distinguished Johnson v Holleran 61 TC 428 – a case where the General Commissioners’ finding that a disability benefit (monthly payments) was a pension taxable under Schedule E was upheld.  Whereas in that case the payments came from the company’s own pension fund, in this case there had to be a further agreement (between JLL, the RSA and the Appellant), and Mr. Mackenzie submitted that the agreement was to pay the monthly payments in consideration for the settlement of the Appellant’s claim for stress damages, which was not the position in Johnson v Holleran.
33.	Mr. Mackenzie went on to submit that if the payments were not instalments of capital, and were, instead, periodical payments of an income character, they fell under section 329AA ICTA and so were not subject to a charge to income tax.
34.	At the hearing, reference was made to Section 329AA in the form it took with effect from 1 April 2005 pursuant to amendment by section 100(2) Courts Act 2003.  This was incorrect, although I do not consider that the differences between the forms of the section are material. For the periods relevant to this appeal, the section took the following form:
“(1) Where–
(a) an agreement is made settling a claim or action for damages for personal injury on terms whereby the damages are to consist wholly or partly of periodical payments; or
(b) a court awarding damages for personal injury makes an order incorporating such terms,
the payments shall not for the purposes of income tax be regarded as income of any of the persons mentioned in subsection (2) below and accordingly shall be paid without any deduction under section 348(1)(b) or 349(1).
(2) The persons referred to in subsection (1) above are–
(a) the person (“A”) entitled to the damages under the agreement or order;
…
(3) The periodical payments referred to in subsection (1) above, or any of them, may, if the agreement or order mentioned in that subsection or a subsequent agreement so provides, consist of payments under one or more annuities purchased or provided for, or for the benefit of, A, by the person by whom the payments would otherwise fall to be made.
…
(5) In this section “personal injury” includes any disease and any impairment of a person’s physical or mental condition.”
35.	Mr. Mackenzie submitted that I should ignore the “continuation of benefit” document because it was mistakenly signed (without legal advice) by the Appellant who was at the time suffering from mental stress.
36.	He accepted that the payments made to the Appellant by RSA, and, later, Canada Life, were not payments of a purchased annuity, but he submitted that this was not fatal to them being regarded as periodical payments within section 329AA ICTA.
37.	He submitted that section 329AA ICTA had been widely drawn, so that the exemption from tax applies in many cases of periodic payments in respect of personal injury.
38.	In particular, he pointed out that the use of the word “may” in s.329AA (3) (which appears in both the version of section 329AA(3) considered at the hearing and also in the applicable version set out above) indicated that the draftsman intended that other forms of periodical payments (besides payments by way of annuity) were intended to be included in the exemption provided for by the section.
39.	Mr. Mackenzie submitted that the evidence showed that both the Appellant and JLL intended that the arrangement whereby the Appellant received monthly payments from the RSA and, later, Canada Life, should cause the payments to come within the exemption in section 329AA. 
40.	Mr. Charnock, for the Revenue, submitted that the payments from the RSA, and, later Canada Life, to the Appellant were properly chargeable as a pension under section 19(3) ICTA, which provides that “tax under [Schedule E] shall also be charged in respect of any pension which is paid otherwise that by or on behalf of a person outside the United Kingdom”.
41.	He relied on Johnson v Holleran for the proposition that the payments were payments of a pension.
42.	Mr. Charnock submitted that the evidence showed that the RSA accepted a benefit claim in respect of the Appellant, made by JLL in August 2001 under the PHI policy.  He noted that at that time the payments were made and taxable as sickness benefit.  He submitted that membership under the scheme was secured until 60 years of age and that there was provision that the benefit could continue if a member ceased employment during disability, in which case payments would continue.
43.	He submitted that the Appellant became entitled to payments under the policy from August 2001.  The fact that he ceased employment in March 2002 did not change the nature of the payments from income to capital.  The payments remained income in the hands of the Appellant, but rather than being charged as sickness benefits, they became chargeable as pension income.  The payments were directly related to his previous employment and were chargeable pension payments on the principles established in Johnson v Holleran.
44.	Alternatively, Mr. Charnock submitted that the payments were income payments chargeable under section 18 ICTA as annual payments.  He cited CIR v Corporation of London (as Conservators of Epping Forest) 34 TC 293 and Forsyth v Thompson 23 TC 374.
45.	As to the Appellant’s claim that the payments came within the exemption in section 329AA ICTA, Mr. Charnock submitted that the evidence does not support the Appellant’s contention.  JLL has, under the Compromise Agreement, acknowledged the Appellant’s prospective claim for damages and made a payment of £47,500 compensation on account of that.  The sums of £12,500 and £47,500  (collectively described as the Compensation Payment and the PI Payment) had been accepted by the Appellant under the Compromise Agreement in full and final settlement of his prospective personal injury claim related to work related stress.
46.	Mr. Charnock submitted that there was no reference in the evidence to the settling of a claim for personal injury damages in the form of periodical payments.
47.	He agreed that the mere fact that a liability was not quantified or admitted would not of itself prevent instalment payments made in consideration of the claim being settled, from being capital in nature.  However he said that here the payments were made because the Appellant had an entitlement to them under the PHI policy and not because of the Compensation Agreement or because of a claim made for stress-related damages.
Decision
48.	Although I have sympathy for the Appellant, I regret that I must dismiss this appeal.
49.	There are no circumstances disclosed by the evidence which indicate that the payments under the PHI policy from the RSA, and, later, Canada Life, to the Appellant are capital in nature.  On the contrary, they are benefit payments which continue to be made “as though [the Appellant] were still included in the Policy” (see: paragraph 2E of the policy).  The fact that the policy envisaged that the payments would be made by means of a special continuation policy in the Appellant’s name (and that this has not been done) does not, in my judgment, affect the position.  Payments were made by the insurance company to the Appellant direct, as envisaged by paragraph 2E of the policy.  The payments, which continue to be made so long as the Appellant is unable to work, are not made in discharge of any claim for an amount (or estimated amount) of damages.
50.	The payments are more aptly described as pension payments taxable under Schedule E, having regard to their origin as benefits of the Appellant’s employment, than as annual payments taxable under section 18(3) ICTA.  See: Johnson v Holleran.
51.	The payments do not, in my judgment, come within section 329AA ICTA.  The evidence disclosed no agreement settling a claim for damages for personal injury whereby the damages consisted wholly or partly of the payments under the PHI policy from the RSA and, later, Canada Life.  That claim was, as Mr. Charnock submitted, expressly settled by the payments of £12,500 and £47,500  (collectively described as the Compensation Payment and the PI Payment) which were accepted by the Appellant under the Compromise Agreement in full and final settlement of his prospective personal injury claim related to work related stress.  Miss Wooderson’s evidence confirmed that these provisions of the Compromise Agreement reflected the reality of the position from her viewpoint.  In particular she expressly denied that JLL were liable for damages in the amount of £750,000 or any similar sum in discharge of which liability the payments under the PHI policy were made.
52.	Mr. Mackenzie submitted that no PHI insurer would make payments after a termination of employment unless it was required to do so.  I agree.  However I do not agree that here the RSA was required to do so because of the Appellant’s claim for stress-related damages. The continuation of the benefit payments in the circumstances envisaged by paragraph 2E of the PHI policy did not have any cost implications for JLL.  It was a benefit which was available as an adjunct of the policy and JLL was content that the Appellant should be given the benefit of it, provided this was achieved in such a way that JLL was not exposed to any further related liability in the future.  This was the plain thrust of Miss Wooderson’s evidence, which I accept.  It follows that I do not accept that the statement of the Appellant cited at paragraph 16 above is an accurate description of what happened.
53.	The advice of Mr. Justice (see: above, paragraph 14) was not implemented, and his “Case Overview” is of no assistance in the resolution of the issue arising in this appeal. 
54.	Accordingly I hold that the condition set out in section 329AA ICTA, for there to be an agreement made settling a claim for damages for personal injury on terms whereby the damages are to consist wholly or partly of periodical payments, is not met in this case.
55.	I dismiss the appeal.

           JOHN WALTERS QC
SPECIAL COMMISSIONER

RELEASE DATE: 8 August 2007

SC/3107/2006