[2010] UKFTT 584 (TC)

TC00834

Appeal number: TC/2010/01343

Termination payment - whether a payment fell within Section 401 of the Income Tax (Earnings and Pensions) Act 2003 or was pay in lieu of notice and thus within Section 62 of the Income Tax (Earnings and Pensions) Act 2003

FIRST-TIER TRIBUNAL

TAX 

	MS JANELLE HOWELL	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	MRS.S.M.G.RADFORD (TRIBUNAL JUDGE)						MR.N.DEE							

Sitting in public at Holborn Bars, London EC1N 2NQ on 28 September 2010

Mr Simon Born for the Appellant

Ms Helen Thorn for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against a closure notice issued under Sections 28A(1) and (2) of the Taxes Management Act 1970 (“TMA”) following the conclusion of an enquiry into a self assessment return for the year ended 5 April 2006. The enquiry officer concluded that a payment of £14,000 made to the Appellant had been correctly taxed by her company as a payment in lieu of notice (“PILON”). The Appellant claimed that the payment was compensation for breach of contract.

Background and facts
2.	The Appellant had been employed by the company Lend Lease Europe Limited. She was called into a formal redundancy consultation meeting on 28 October 2005 by the Human Resources department for discussions on the company’s plans to make her redundant.
3.	Notes of the meeting reflect that the Appellant was told that if she was made redundant she would receive the following payments which would be subject to tax where indicated:
•	Salary and benefits up to and including termination date – to be taxed
•	Any holiday accrued and not taken up to termination date – to be taxed
•	Salary in lieu of 4 months notice – to be taxed
•	Statutory redundancy pay of £1,400 – tax free payment
•	Ex-gratia payment in lieu of 4 Months benefits of £3,911 – company understands that this can be paid without the deduction of tax
•	Company would provide Bupa medical insurance cover for 4 months after the termination date
•	Ex-gratia one month’s salary and benefits of £4,478 – company understands this can be paid without the deduction of tax
•	£500 plus VAT to be paid to Penna Consulting for the Appellant to have outplacement services.
4.	The Appellant received a letter from the company dated 10 January 2006 which stated that she would be made redundant on 13 January 2006. The terms of her redundancy were stated to be:
•	Her service with the company would end on 13 January 2006 and she would receive four months pay in lieu of notice as compensation for the notice periods detailed in the Staff Handbook. She would receive the sum of £14,000 being the company’s pay in lieu of notice.
•	Under the terms of the Employment Rights Act 1996 she was entitled to receive five weeks redundancy pay which amounted to £1,400.
•	She was also entitled to receive an ex-gratia payment in lieu of 4 months benefits which amounted to £8,389.
•	In addition she was entitled to a bonus payment equalling to £3,542 which would be taxable.
5.	 The letter concluded that the total package exclusive of her holiday entitlement was therefore £23,789 which would be paid free of tax either into her bank account or by cheque.
6.	On 16 January 2006 the Human Resources Manager wrote to the Appellant to explain that his letter of 10 January 2006 was incorrect. Referring to her contract of employment he informed her that she was legally obliged to pay tax on her PILON of £14,000.
7.	The Appellant received a £30,361 gross final payment (£22,046.39 net) from the company. When the Appellant completed her tax return for the year ended 5 April 2006 in the section under lump sum and compensation payments she filled in the amount of £20,289 as a tax free payment from which tax of £8,115.50 (which she inserted into box 1.30) had been deducted.
8.	On the 15 November 2007 an enquiry was opened into the return and the enquiry officer informed the Appellant that the enquiry was into her income. He requested full details of the circumstances leading up to her termination of employment payment and all relevant documents which might explain why the payment was made, on what terms it was made and a breakdown of its relevant parts.
9.	After receiving the relevant information from the Appellant’s agent and the PAYE figures for the year from her previous employer the enquiry officer informed the agent that the Appellant had incorrectly completed her tax return. The employer had recorded the Appellant’s total taxable pay for the year as £62,226.82 with tax deducted of £18,425. The tax deducted included the amount of £8,115.50 which the Appellant had recorded as having been deducted from a tax free payment.  As a result of her error the enquiry officer believed that the Appellant had received a tax refund to which she was not entitled.
10.	The agent replied claiming that the employer had incorrectly taxed the whole termination payment whereupon the officer asked for further information regarding the Appellant’s terms of employment and the termination payment together with her payslips.
11.	The agent provided the requested information and claimed that the payment had been made solely in connection with the termination of the Appellant’s employment and was regarded by her as compensation for breach of contract.
12.	The final payslip recorded a total net payment to the Appellant of £22,046.39 with tax deducted of £8,815.48.
13.	An extract from the Employee Handbook stated “if either you or the company wish to terminate your employment notice must be given in writing in accordance with the following schedule…..more than 5 years but less than 10 years….company to employee….4 months. The Appellant had worked for the company for more than 5 years and so was entitled to 4 months notice from the company.
14.	The Appellant’s contract of employment under the paragraph headed “termination of employment” stated that “the company may decide to pay salary in lieu of notice”. The enquiry officer noted that the £14,000 that the Appellant had received as part of the termination package was exactly equal to 4 months salary. 
15.	The enquiry officer then wrote to the Appellant’s agent enclosing a copy of the extract of the Employee Handbook stating that if it was read in conjunction with the Appellant’s contract of employment the Appellant was entitled to be given 4 months notice of termination of her employment as she had been in continuous employment with the company since 1 December 2000. If the required period of notice was not given to the Appellant then in accordance with her contract of employment the employer could pay her salary in lieu of notice.
16.	The agent however wished to rely on the letter of 10 January 2006 as reflecting the agreement between the Appellant and the company but the enquiry officer decided that the letter contained incorrect information concerning the tax payable in respect of the £14,000 payment which was corrected by the Human Resources Department’s letter of 16 January 2006.
17.	The enquiry officer concluded that the £14,000 was a PILON which had been correctly taxed by the company because it fell within Section 62 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and not Section 401 of ITEPA.
18.	On 2 September 2009 the enquiry officer informed the Appellant’s agent that a closure notice would be issued in the next seven days. The Appellant’s tax return would be amended and the tax deducted figure of £8,115.60 at box 1.30 would be removed.
19.	The agent referred to his letter of 26 November 2008 which contended that whilst the minutes of the meeting of 28 October set out the position at that time, the position had subsequently changed and the letter of 10 January reflected the correct position.
20.	On 21 September 2009 HMRC issued a closure notice and informed the Appellant that her tax return had been amended to reflect HMRC’s final conclusion. This was that the company had correctly deducted tax from the PILON. Whilst the tax return had previously shown that an excess amount of £9,259.10 tax had been paid this was wrong. The correct figure was that an excess of £1,132.81 tax had been paid and the return had been amended to reflect this figure. As HMRC had already repaid the £9,259.10 to the Appellant, the Appellant was now due to pay £9,481.17 to HMRC and this figure included all the items not just those relating to the termination payment.
21.	The agent for the Appellant requested a review of this conclusion and the reviewing officer upheld the enquiry officer’s decision whereupon the Appellant appealed to the Tribunal.

The Law and Revenue Guidance
22.	Section 62 of ITEPA states:
(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.
(3) For the purposes of subsection (2) “money’s worth” means something that is—
(a) of direct monetary value to the employee, or
(b) capable of being converted into money or something of direct monetary
value to the employee.

23.	Section 401 of ITEPA states:
	(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, blood relative, dependant or personal
representatives.

(2) Subsection (1) is subject to subsection (3) and sections 405 to 413 (exceptions for
certain payments and benefits).

(3) This Chapter does not apply to any payment or other benefit chargeable to
income tax apart from this Chapter.

(4) For the purposes of this Chapter—
(a) a payment or other benefit which is provided on behalf of, or to the
order of, the employee or former employee is treated as received by the
employee or former employee, and
(b) in relation to a payment or other benefit—
(i) any reference to the employee or former employee is to the
person mentioned in subsection (1), and
(ii) any reference to the employer or former employer is to be read
accordingly.

24.	Section 402 of ITEPA states:
(1) In this Chapter “benefit” includes anything in respect of which, were it
received for performance of the duties of the employment, an amount—
(a) would be taxable earnings from the employment, or
(b) would be such earnings apart from an earnings-only exemption.
		This is subject to subsections (2) to (4).
(2) In this Chapter “benefit” does not include a benefit received in connection with
the termination of a person’s employment that is a benefit which, were it
received for performance of the duties of the employment, would fall within—
(a) section 239(4) (exemption of benefits connected with taxable cars and
vans and exempt heavy goods vehicles), so far as that section applies to
a benefit connected with a car or van,
(b) section 269 (exemption where benefits or money obtained in connection
with taxable car or van or exempt heavy goods vehicle),
(c) section 319 (mobile telephones), or
(d) section 320 (limited exemption for computer equipment).

(3) In this Chapter “benefit” does not include a benefit received in connection with any change in the duties of, or earnings from, a person’s employment to the extent that it is a benefit which, were it received for performance of the duties of the employment, would fall within section 271(1) (limited exemption of removal benefits and expenses).

(4) The right to receive a payment or benefit is not itself a benefit for the purposes of this Chapter.

25. Section 403 of ITEPA deals with payments and benefits treated as employment income:

(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.

(2) In this section “the relevant tax year” means the tax year in which the payment
or other benefit is received.

(3) For the purposes of this Chapter—
(a) a cash benefit is treated as received—
(i) when it is paid or a payment is made on account of it, or
(ii) when the recipient becomes entitled to require payment of or on
account of it, and
(b) a non-cash benefit is treated as received when it is used or enjoyed.

(4) For the purposes of this Chapter the amount of a payment or benefit in respect
of an employee or former employee exceeds the £30,000 threshold if and to the
extent that, when it is aggregated with other such payments or benefits to
which this Chapter applies, it exceeds £30,000 according to the rules in section
404 (how the £30,000 threshold applies).

26. The Revenue Manual at EIM 13000 states that payments and other benefits are only chargeable under the special rules in Section 401 ITEPA 2003 if they cannot be charged to income tax in any other way and that the first step when a payment is made to an employee that appears to fall within the scope of Section 401 ITEPA 2003 is to consider whether it is in fact chargeable under other provisions (see EIM 12810).
27. The Revenue Manual at EIM 12850 states that the most common termination payments and benefits within EIM12810 which are taxable in full under Section 62 ITEPA 2003 include a payment received under the terms and conditions of service. Such terms may be in the main contract document or elsewhere, for example in a staff handbook or letter of appointment.
28. Regulation 37 of the Income Tax (Pay As You Earn) Regulations states that any relevant payment made after the employment has ceased is taxed at the basic rate of tax in force for the tax year in which the payment is made.
29. In the case of EMI Group Electronics v Coldicott 71TC 455 the Court of Appeal stated that:
	“there is nothing in the authorities which requires this court to reach the conclusion that a payment in lieu of notice, made in pursuance of a contractual provision, agreed at the outset of the employment, which enables the employer to terminate the employment on making that payment, is not properly to be regarded as an emolument from that employment”.
30. In Richardson v Delaney TC74 167 the High Court rejected a taxpayer’s claim that a payment was in respect of a breach of contract. The employment contract stated that “The company may at its absolute discretion elect to terminate the employment of the executive with immediate effect by paying to the executive salary in lieu of notice.

Appellant’s submissions
31. Mr Born for the Appellant submitted that the appeal concerned Sections 401 and 62 of ITEPA. Under Section 401 the Appellant was entitled to receive up to £30,000 free of tax.
32. The company wanted to make the Appellant redundant but unfortunately the Human Resources Department did not keep notes of all the discussions. It was important to establish the nature of the payment made. If it was contractual then it was taxable but if the money received was for damages or for breach of contract then it fell under Section 401 of ITEPA.
33. The Appellant contended that whilst negotiations were taking place she was only interested in the net amount of money she would receive not how it would be taxed and the company were trying to justify the amount of money she would receive. When she received the first letter dated 10 January 2006 stating that the payment to her would be free of tax she was satisfied that this was what had been agreed.
34. The second letter of 16 January 2006 did not reflect what she had agreed. The object of the Appellant’s negotiations had been to receive a certain amount of money and this letter reduced the amount agreed.
35. Mr Born said that he did not believe that you could have a PILON unless both parties agreed to it. In his submission a monetary payment was made to the Appellant to make her go away. A settlement figure was agreed, the Appellant did not interpret its constituent parts and the employer retrospectively decided that £14,000 of the payment was a PILON.
36. The employer had not produced any signed meeting note or compromise agreement and the Appellant had been financially punished by her employer’s mistake. The employer had gone back on the agreement by deducting tax from the payment so the Appellant had claimed the tax back on her tax return.
37. The Appellant was adamant that the payment was damages for breach of contract. As to the validity of the notes in respect of the meeting on 28 October 2005 the Appellant contended that at that meeting it had not been finally decided that she would be made redundant and it was just a preliminary discussion.
38. The P45 was completed incorrectly by the employer and not in accordance with the agreement between the parties.

HMRC’s Submissions
39. HMRC contended that the Appellant had a contractual right to receive £14,000 because of the information in the Employer’s Handbook.
40. HMRC submitted that there was no breach of contract because the Appellant had received exactly what was due to her under the terms of her contract with the company. If both the Employee Handbook and the Contract of Employment were read together then the Appellant was entitled to be given 4 months notice of employment as she had been in continuous employment with the company since December 2000.
41. There was no negotiation regarding the sums paid on her departure from the company. In the event that such period of notice was not given to the Appellant then in accordance with her contract of employment the company could pay her salary in lieu of notice.
42. The letter from the company dated 16 January 2006 quickly revised the information detailed in their earlier letter of 10 January 2006 explaining that unfortunately she was legally obliged to pay tax on her in lieu of notice payment and therefore the four months redundancy payment of £14,000 was subject to tax.
43. The £14,000 was exactly 4 times the Appellant’s gross salary of £3,500 as shown by the Appellant’s December 2005 payslip and bore none of the hallmarks of a damages payment.
43. All the taxable payments including the £14,000 were marked on the P45 which was completed by the company’s payroll department.
45. No evidence was held by the Appellant regarding the tax deduction of £8,115.60 which she had entered into box 1.30 of her tax return therefore the entry was inappropriate.
46. HMRC submitted that in the absence of any other evidence to the contrary the payment of £14,000 was a PILON and fell to be taxable under Section 62 of ITEPA 2003.
47. By virtue of Section 50(6) of TMA the onus of proof rested with the Appellant to show that the payment was taxable under Section 401 ITEPA and attracted the exemption under Section 403 ITEPA.

Findings
48. A contract of employment was signed by the Appellant which stated under the heading “Termination of Employment” that the “company may decide to pay salary in lieu of notice”. The Revenue Manual at EIM 12850 states that the most common termination payments and benefits within EIM12810 which are taxable in full under Section 62 ITEPA 2003 include a payment received under the terms and conditions of service. Such terms may be in the main contract document or elsewhere, for example in a staff handbook or letter of appointment.
49. The Appellant attended a meeting at which it was explained to her that if she accepted redundancy rather than a transfer to another office she would receive certain payments including her salary in lieu of 4 months notice which would be taxed. The meeting notes include the fact that when the Appellant was asked whether she had any questions in relation to the payments mentioned she confirmed that she did not.
50. Although the company informed the Appellant in a letter dated 10 January 2006 that the total package of £23,789 would be paid free of tax they quickly realised their mistake and wrote to correct it. The company regarded the £14,000 as a PILON which they were legally obliged to pay in terms of the Appellant’s contract of employment and from which they were also legally obliged to deduct basic rate tax. £14,000 was exactly 4 months salary, the Appellant being paid £3,500 per month.
51. We have seen no evidence of any negotiations or compromise agreements and find it most unlikely that the company would have made such a payment for breach of contract or damages without insisting that the Appellant sign an agreement confirming her acceptance thereof.
52. The cases of EMI and Richardson v Delaney support the contention that a PILON should be taxed as an emolument of the employment and taxable under Section 62 of ITEPA.

Decision
53. The appeal is dismissed.
54. 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.

S.M.G.RADFORD
TRIBUNAL JUDGE

RELEASE DATE: 17 November 2010