England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CHANF 98/0512/3

(MR JUSTICE NEUBERGER )

Royal Courts of Justice

Strand

London WC2

Friday, 16 July 1999

B e f o r e:

LORD JUSTICE SIMON BROWN

LORD JUSTICE CHADWICK

MR JUSTICE RATTEE

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EMI GROUP ELECTRONICS LIMITED

APPELLANTS

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COLDICOTT (HMIT )

RESPONDENTS

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(Transcript of the handed down judgment of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR A THORNHILL QC with MR C McDONNELL (Instructed by Messrs Rowe & Maw, London EC4V) appeared on behalf of the Appellant

MR L HENDERSON QC with MR T BRENNAN (Instructed by Solicitor of Inland Revenue) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

Friday, 16 July 1999

J U D G M E N T

Chadwick LJ: This is an appeal from the order made on 22 October 1997 by Mr Justice Neuberger on an appeal by EMI Group Electronics Limited, from the decision of the Commissioners for the special purposes of the Income Tax Acts. The appeal raises, once again, the question whether payments made to employees on the occasion of the determination of their employment are taxable under Case I of Schedule E as emoluments from that employment.

The underlying facts are set out in an agreed statement which was before the special commissioners. They may be summarised as follows:

1. The relevant employees, Mr A G D Soames and Mr J D Hussey, were employed by the taxpayer (then known as Thorn EMI Electronics Ltd) at senior management level under contracts of employment which contained the following provision for termination:

NOTICE OF TERMINATION

The senior manager is required to give the Company three months’ notice in writing of the intention to terminate employment. The Company will give its senior managers six months’ notice in writing of its intention to terminate employment, except during the first six months of service, when this will be reduced to three months’ notice.

The Company reserves the right to make payment of the equivalent of salary in lieu of notice and to terminate employment without notice or payment in lieu for gross misconduct.

2. Mr Soames was given notice of termination of his employment, on grounds of redundancy, by letter dated 26 March 1987. At that date his salary was £25,000 per annum. His employment was determined with effect from the following day, 27 March 1987. The letter of termination informed him that:

Under the terms of the Company’s severance payment scheme, you will receive the following payment:

Total redundancy payment £12,500

Including Statutory Redundancy

Payment of £3,592

Payment in lieu of Notice £12,500

TOTAL £25,000

3. Mr Hussey was given notice of termination of his employment, also on grounds of redundancy, by letter dated 19 November 1992. At that date his salary was £29,000 per annum. His employment was determined with effect from the end of that month, 30 November 1992. The letter of termination informed him that:

Your salary will be paid up to and including 30 November 1992, but you are not required to report to work after today . . .

You will receive a cheque for £16,013.93. This covers both redundancy pay and pay in lieu of notice

The payment of £16,013.93 was made up of redundancy pay (£5,555.60 - the equivalent of ten weeks salary) which included the statutory redundancy payment; and payment in lieu of notice (£10,458.33). The payment in lieu of notice was calculated as follows:

Salary in lieu

6 months £14,500.00

less one week (to 30 November 1992) £ 555.56

£13,944.44

less notional tax at 25% £ 3,486.11

£10,458.33

4. The deduction of notional tax, in calculating the amount of the payment in lieu, reflected a change in the employer’s practice which had been introduced in October 1991. Under the new practice, where an employee had been given notice to determine his employment with effect from a date which was before the end of the six month notice period, the payment in lieu was calculated by deducting from the employee’s basic salary for the remainder of the notice period an amount equal to the amount of tax which would have been deducted, under PAYE, if he had continued in employment until the end of the notice period. The effect of the change was that, although Mr Soames (whose employment was terminated before October 1991) had received a payment equal to the amount of his salary (for the period in lieu of notice) without deduction of tax, Mr Hussey (whose employment was terminated after October 1991) received a payment equal only to the amount of his salary (for the relevant period) after deduction of tax. The change in practice does not affect the question whether or not the employer is accountable for tax in respect of the payment made to the employee. It may affect the amount of tax for which the employer is accountable (if at all); but that is not a question for decision on this appeal.

5. Determinations were made against the appellant, as employer, in respect of the tax year 1986/87 under regulation 29 of the Income Tax (Employments) Regulations 1973 and in respect of the tax year 1992/93 under regulation 49 of the Income Tax (Employments) Regulations 1993. Those regulations (the later of which replaces the earlier in respect of the years to which it applies) - made under what is now section 203(2) of the Income and Corporation Taxes Act 1988 - enable the revenue to recover from the employer tax which (as it appears to the inspector) should, under section 203(1) of that Act, have been deducted from an employee’s emoluments and which has not been paid to the collector.

The employer appealed to the special commissioners against those determinations. There was no dispute that, if the payments in lieu were taxable under Schedule E, as emoluments within Case I, the determinations were properly made. Nor was there any dispute that the payments were capable of being “emoluments” within the meaning given to that expression by section 131(1) of the 1988 Act: that is to say “all salaries, fees, wages, perquisites and profits whatsoever”. The only issue was whether the payments were properly to be regarded as emoluments from the employment in the context of section 19(1) of the Act:

19(1) The Schedule referred to as Schedule E is as follows -

SCHEDULE E

1. Tax under this Schedule shall be charged in respect of any office or employment on emoluments therefrom which fall under any one or more of the following Cases -

Case I: any emoluments for any year of assessment in which the person holding the office or employment is resident and ordinarily resident in the United Kingdom . . .

It is common ground that, if the payments were not chargeable to tax under Case I of Schedule E, they would fall within section 148(2) of the 1988 Act (“Payments on retirement or removal from office or employment”) - formerly section 187(2) of the Income and Corporation Taxes Act 1970. But tax is not charged under section 148(1) in respect of payments not exceeding £30,000 (£25,000 in the tax year 1986/87) - see section 188(4) of the 1988 Act and section 188(3) of the 1970 Act. Accordingly, notwithstanding the provisions of section 148, the payments to Mr Soames and to Mr Hussey - being less than the exempt sum - are not chargeable to tax unless they do fall within Case I. It is the availability or non-availability of the exemption which gives practical importance to the question in dispute.

The special commissioners, in a decision given on 10 September 1996 (reported at [1996] STC (SCD) 455), held in principle that the payments to Mr Soames and to Mr Hussey were emoluments chargeable to tax under Case I of Schedule E. They dismissed the appeals against the determinations made by the inspector. The employer appealed to the High Court, under section 56A of the Taxes Management Act 1970. That appeal was heard by Mr Justice Neuberger, who gave judgment on 22 October 1997 (reported at [1997] STC 1372). He dismissed the appeal and affirmed the decision in principle of the special commissioners. It is from that order that the employer appeals to this court.

The question whether a payment to an employee is properly to be regarded as an emolument from his employment, for the purposes of what is now section 19(1) of the 1988 Act, was (I think) first considered by the House of Lords some 70 years ago, in Hunter v Dewhurst (1932) 16 TC 605. Since then the question has received consideration by the House of Lords on at least eight occasions - in Cameron v Prendergast [1940] AC 549, Tilley v Wales [1943] AC 386, Hochstrasser v Mayes [1960] AC 376, Laidler v Perry [1966] AC 16, Brumby v Milner [1976] 1 WLR 1096, Bray v Best [1989] 1 WLR 167, Shilton v Wilmhurst [1991] 1 AC 684 and, most recently, in Mairs v Haughey [1994] 1 AC 303. In the last of those appeals Lord Woolf observed, at [1994] 1 AC 303, 320E-F, in a passage cited by the judge in the present case [1997] STC 1372, 1384c-e, that:

. . . this is an area in which there is an abundance of authority. It is not always easy to reconcile these authorities since as is to be expected they are frequently concerned with situations close to the borderline between payments which fall within and payments that fall without the statutory provision. It is possible to have almost an infinite variety of situations which, although they have common characteristics, as a matter of fact and degree fall on one side of the border or the other. In each case ultimately it is a matter of applying the statutory language to the facts.

There were, however, two passages in the earlier decisions which Lord Woolf identified as providing some general assistance. In attempting the task of applying the statutory language to the facts in the present case, it is helpful to have those passages in mind. The first is in the speech of Lord Radcliffe in Hochstrasser v Mayes [1960] AC 376, at pages 391-392. After referring to what he described as glosses put upon the words of the statute - which, although of value as illustrating the idea which those words expressed, did not displace them - Lord Radcliffe said this:

For my part, I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it is paid to him in return for acting as or being an employee.

The second, in the speech of Lord Templeman in Shilton v Wilmhurst [1991] 1 AC 684, at page 689C-E, expresses the concept embodied in the statutory words in these terms:

Section 181 [of the 1970 Act, now section 19(1) of the 1988 Act] is not confined to “emoluments from the employer” but embraces all “emoluments from employment”; the section must therefore comprehend an emolument provided by a third party, a person who is not the employer. Section 181 is not limited to emoluments provided in the course of employment; the section must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, secondly, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that an emolument “from” employment means an emolument “from being or becoming an employee”. The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived “from being or becoming an employee” on the one hand, and an emolument which is attributable to something else on the other hand, for example, to a desire on the part of the provider of the emolument to relieve distress or to provide assistance to a home buyer. If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, then the emolument is not received “from the employment”.

Lord Templeman recognised that the task of determining whether an emolument was paid for being or becoming an employee or was paid for some other reason was frequently difficult and could give rise to fine distinctions.

With that guidance in mind, I turn to what must be the first step in the enquiry whether the payments in the present case fall within or without the statutory language: namely, to identify what, on a true analysis, the payments were for. I find assistance in a passage in the speech of Lord Browne-Wilkinson in Delaney v Staples [1992] 1 AC 687. The question in that appeal was whether a payment in lieu of notice, made following a summary dismissal, was within the definition of “wages” for the purposes of section 7(1) of the Wages Act 1986. The House of Lords was not concerned with the question which arises in this case. But Lord Browne-Wilkinson, at page 692C-H, examined the different senses in which a payment made on termination of employment might be described as a payment in lieu of notice:

The phrase “payment in lieu of notice” is not a term of art. It is commonly used to describe many types of payment the legal analysis of which differs. Without attempting to give an exhaustive list, the following are the principal categories.

(1) An employer gives proper notice of termination to his employee, tells the employee that he need not work until the termination date and gives him the wages attributable to the notice period in a lump sum. In this case (commonly called “garden leave”) there is no breach of contract by the employer. The employment continues until the expiry of the notice: the lump sum payment is simply advance payment of wages.

(2) The contract of employment provides expressly that the employment may be terminated either by notice or, on payment of a sum in lieu of notice, summarily. In such a case if the employer summarily dismisses the employee he is not in breach of contract provided that he makes the payment in lieu. But the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work to be done under the contract of employment.

(3) At the end of the employment, the employer and the employee agree that the employment is to terminate forthwith on payment of a sum in lieu of notice. Again, the employer is not in breach of contract in dismissing summarily and the payment in lieu is not strictly wages since it is not remuneration for work done during the continuance of the employment.

(4) Without the agreement of the employee, the employer summarily dismisses the employee and tenders a payment in lieu of proper notice. This is by far the most common type of payment in lieu and the present case falls into this category. The employer is in breach of contract by dismissing the employee without proper notice. However, the summary dismissal is effective to put an end to the employment relationship, whether or not it unilaterally discharges the contract of employment. Since the employment relationship has ended no further services are to be rendered by the employee under the contract. It follows that the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work done under the contract of employment.

It is, I think, common ground - and, if not common ground, it is plain enough - that the payments which are the subject of the present appeal fall within the second of Lord Browne-Wilkinson’s four categories. It may be observed that the circumstances in which Mr Hussey’s employment was terminated included an element within the first category; but liability to tax in respect of the payment for the week or so during which he was on “garden leave” is not in issue. Payments in the second category have two important features in the present context. First, they are payments made under and in accordance with the contract of employment; second, they are not payments for work done under the contract of employment. But, there is a third feature, which may be regarded as the obverse of the first: they are not payments made by way of compensation or damages for breach of the contract of employment.

An analysis of the termination provisions in the contracts under which Mr Soames and Mr Hussey were employed as senior managers shows those features to exist in the present case. As a matter of contract, the employer has agreed with the employee that his employment may be terminated in one of four ways: (i) by the employee giving to the employer not less than three months’ notice in writing of his intention to terminate employment; (ii) by the employer giving to the employee not less than six months’ notice in writing (or not less three months’ notice during the first six months of service) of its intention to terminate the employment; (iii) by the employer giving to the employee notice of its intention to terminate the employment within the period of six months from the date of the notice and making a payment equivalent to his salary in respect of the remainder of that six month period; or (iv) by the employer summarily, without notice or payment, in a case of gross misconduct. Termination by methods (i) and (ii) is spelt out in the first paragraph of the relevant clause in the contracts of employment; termination by methods (iii) and (iv) is spelt out in the second paragraph of that clause - introduced by the words “The Company reserves the right”. The effect of those words is that notwithstanding the provisions for termination already set out in the first paragraph - in particular, by method (ii) - the employer may also terminate the employment by one of the methods described thereafter in the second paragraph - in particular, by method (iii).

The provisions of the contract were, of course, subject to statutory obligations as to notice out of which the parties could not contract. Those statutory obligations were set out, at the relevant time, in section 49 of the Employment Protection (Consolidation) Act 1978 - now re-enacted in section 86 of the Employment Rights Act 1996. In particular, section 49(1) of the 1978 Act set out the minimum period of notice which an employer was required to give. Section 49(3) provided that any provision for shorter notice in any contract of employment with a person who had been continuously employed for one month or more had effect subject to subsection (1). The minimum period of notice prescribed by section 49(1) could not extend beyond twelve weeks - see paragraph (c) of that sub-section. So a contractual provision for six months’ notice was unobjectionable. But there was a second limb to section 49(3):

49(3) . . . ; . . . this section does not prevent either party from waiving his right to notice on any occasion or from accepting a payment in lieu of notice.

As this court explained in Rex Stewart Jeffries Parker Ginsberg Limited v Parker [1988] IRLR 483, at page 486 (paragraph 32):

The latter part of subsection (3) [of section 49 of the 1978 Act] clearly governs the earlier part and if (as here) the contract provides for payment in lieu of notice - or if , indeed, the parties by agreement agree that the employee shall accept a payment in lieu of notice, provided the payment relates to a period no shorter than that of the notice to which he would be entitled, either under the contract or under s.49(1) - the last part of s.49(3) applies, and a payment in lieu of notice can properly terminate the contract of employment.

So there was no reason, in the present case, why the contractual provisions should not take effect in the way that I have described. Indeed, that was said by this court in the Rex Stewart case to be the effect of a comparable provision in the contract which was there under consideration. The provision was in these terms:

The duration of this contract is for one year, commencing on 1.10.79. Thereafter your service may be determined by the giving of six calendar months’ notice on either side or the payment of six months’ salary in lieu thereof.

The judge in that case (His Honour Judge Lewis Hawser QC sitting as a judge of the Queen’s Bench Division) had described that provision as offering “two alternative methods of lawful determination (that is by six months’ notice or six months’ wages)”. He had rejected the argument that the provision for six months’ salary in lieu was “doing no more than quantifying damages which will be payable for a breach of the requirement of a proper period of notice”. This court expressly agreed with his view on that point - see the observation of Lord Justice Glidewell (with whom Sir Roualeyn Cumming-Bruce agreed) at page 485 (paragraph 24).

The question, therefore, is whether 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 properly to be regarded as an emolument from that employment. In the absence of authority which compels a contrary conclusion, I would have no doubt that that question must be answered in the affirmative. It seems to me to fall squarely within the tests posed by Lord Radcliffe in Hochstrasser v Mayes [1960] AC 376, at pages 391-392 - “paid to him in return for acting as or being an employee” - and by Lord Templeman in Shilton v Wilmshurst [1991] 1 AC 684, at page 689 - “an emolument ‘from being or becoming an employee’” - which Lord Woolf approved in Mairs v Haughey [1994] 1 AC 303, at pages 320-321.

The point can, I think, be illuminated by considering the related question “why is the employee entitled to six months’ notice of the employer’s intention to terminate his employment?”. The answer must be “ because that was the security, or continuity, of employment which the employee required as an inducement to enter into the contract of employment”. The answer to the question “why is the employee entitled to a payment equal to his salary for the remainder of the six month period if his employment is terminated by less than six months’ notice?” must be the same: “that was the security, or continuity, of salary which he required as an inducement to enter the employment”. It is necessary to keep in mind that (save, perhaps, in exceptional circumstances) the real reason why an employee requires a period of notice is not because he wants to continue working while he finds alternative employment; it is because he wants to continue being paid while he finds alternative employment.

I turn, therefore, to consider whether there is authority which compels a contrary conclusion. In Henry v Foster (1932) 16 TC 605 the taxpayers, who had resigned from their office as directors of a limited company, received compensation, to which they were entitled under the provisions of article 109 in the articles of association, equivalent to the total remuneration which they had received in the previous five years. It was held, by the Court of Appeal, that the payments were emoluments from the office; and so taxable under Schedule E. Lord Justice Lawrence explained why he reached that conclusion, at page 632:

In my judgment, the determining factor in the present case is that the payment to the Respondent whatever the parties may have chosen to call it was a payment which the company had contracted to make to him as part of his remuneration for his services as a director. It is true that payment of this part of his remuneration was deferred until his death or retirement or cesser of office, and that in the articles it is called “compensation for loss of office”. It is, however, a sum agreed to be paid in consideration of the Respondent accepting and serving in the office of director, and consequently is a sum paid by way of remuneration for his services as a director.

Lord Justice Romer said this, at pages 633-634:

Now, supposing that a director is employed upon the terms that he is to be paid in each year of his service a sum of £1,000, and in the last year of his service a sum of £5,000 in addition to the £1,000, no one I think could doubt in such a case that the £5,000 was a profit of his office, paid to him in respect of his office, that it was liable to Income Tax, and was to be treated for the purposes of tax as forming part of his salary for the last year of his office.

The case before us is precisely that case, with two exceptions: Firstly, that the sum is not fixed, but has to be ascertained by reference to events which will not be determined until the last year of office - that can make no difference at all - and, secondly, that article 109 expresses that the sum to be paid in the last year of office is to be compensation for loss of office. Now, do those words make any difference? In my opinion they do not. In the first place, it cannot matter what the parties call the money which is to be paid in the last year of office if one finds, as here, that the only consideration for the payment by the company of that sum is the service by the director and that it is a sum for which the director must be deemed to have stipulated when offering his services to the company and that it is paid to him by reason of his having performed those services. . . .

There was no appeal from the decision of the Court of Appeal in Henry v Foster. But Hunter v Dewhurst (1932) 16 TC 605 came before the court (Lord Hanworth, Master of the Rolls, Lord Justice Lawrence and Lord Justice Slesser) about a month later. The taxpayer had been chairman of the same company, but had resigned that position. He had not retired as a director; but, in consideration of the payment of £10,000, had agreed to remain on the board, with a reduced remuneration, waiving all rights to any future payment under article 109. The court reached the same conclusion as in Henry v Foster and held that the £10,000 was chargeable under Schedule E. The taxpayer appealed. The House of Lords (Viscount Dunedin and Lord Macmillan dissenting) allowed that appeal. The reason is, I think, best expressed in the speech of Lord Atkin, at page 645:

The £10,000 was not paid for past remuneration, for the condition of its becoming payable, for instance, loss of office, never was performed. It was not paid for future remuneration, for that was expressed to be £250 per annum, which was to be the sole remuneration. It seems to me that a sum of money paid to obtain a release from a contingent liability under a contract of employment cannot be said to be received “under” the contract of employment, is not remuneration for services rendered or to be rendered under the contract of employment, and is not received “from” the contract of employment.

There is nothing in the speeches in the House of Lords in Hunter v Dewhurst which suggests that the majority took the view that the Court of Appeal had reached the wrong conclusion in Henry v Foster . The basis of the decision in Hunter v Dewhurst was that the payment was not made under the original contract embodied in article 109 - which, as the Court of Appeal had held, was the contract upon which the directors had agreed to provide their services from the outset - but under a subsequent contract by which the company obtained a release from its obligations under article 109. The two decisions provide a striking illustration of the difference between the treatment, for the purposes of Case I of Schedule E, of a payment on termination which is made pursuant to an obligation entered into at the commencement of the employment and a payment on termination which is made pursuant to an agreement to waive or release an existing obligation entered into at the commencement of the employment. I find nothing in Hunter v Dewhurst which leads me to the conclusion that the provisional view which I have already expressed in relation to the present appeal is wrong; and I find support for that provisional view in the reasoning of the Court of Appeal in Henry v Foster .

Hunter v Dewhurst was distinguished in Cameron v Prendergast [1940] AC 549. The appellant taxpayer, a director of a company on remuneration of £1,500 per annum, had informed his fellow directors of his wish to resign his office. He was persuaded not to do so on terms that he was paid a capital sum of £45,000 and would receive a reduced remuneration of £400 per annum for remaining on the board in an advisory capacity. The House of Lords held that the £45,000 was chargeable to tax under Schedule E. The reason appears in the speech of Viscount Maugham, at page 559:

If a sum is paid to a man who has long been and still is a director of a company and whose services are greatly valued, and if the consideration is that he will not resign but will continue to act as a director, I cannot myself doubt that in such a case the sum is a profit of his office and that it is liable to tax, and none the less that the time during which he will continue to be a director is not fixed.

Hunter v Dewhurst and Cameron v Prendergast were considered by the House of Lords in Tilley v Wales [1943] AC 386. In that case the appellant taxpayer was employed as managing director of a company at a salary of £6,000 per annum with a right, on his ceasing to be employed by the company to receive a pension of £4,000 per annum for ten years. Subsequently, while still in employment, he entered into a new agreement under which he released the company from the obligation to pay the pension and agreed to continue to serve as managing director at a reduced salary of £2,000 per annum. In consideration of the release and the agreement to take a reduced salary the company paid him £40,000. The House of Lords held that so much of the £40,000 as was attributable to the commutation of pension was not taxable under Schedule E; but that so much of that capital sum as was attributable to the reduction of salary was so taxable. The pension element was not taxable, because - following Hunter v Dewhurst - that was properly to be regarded as a payment to obtain a release from a contingent liability rather than as remuneration under the contract of employment - per Viscount Simon at page 392 and Lord Thankerton at page 396. But the salary element of the capital sum was to be regarded as an amount paid pursuant to:

. . . an arrangement made between an employer and his servant under which, instead of the whole or part of a periodic salary, a single amount is paid and received in respect of the employment.

- per Viscount Simon at page 393; and so fell within the reasoning in Cameron v Prendergast .

Following the trilogy of decisions in the House of Lords to which I have referred, the Court of Appeal had to consider the question of termination payments again in the two appeals of Henley v Murray (1950) 31 TC 351 and Dale v de Soissons (1950) 32 TC 118. In Henley v Murray the taxpayer was managing director of a company under a service agreement terminable after 31 March 1944 by three months notice on either side. By agreement, he resigned from the company on 6 July 1943 and received a payment which represented (as to £2,202) the remuneration to which he would have been entitled for the period 7 July 1943 to 31 March 1944. He was assessed to tax on that sum under Case I of Schedule E. His appeal was allowed by this court. Lord Justice Jenkins identified the question, at page 367:

As the many cases on this topic show, it is often very difficult to determine the character of a payment made to the holder of an office when his tenure of the office is determined or the terms on which he holds it are altered, and the question in each case is whether, on the facts of the case, the lump sum paid is in the nature of remuneration or profits in respect of the office or is in the nature of a sum paid in consideration of the surrender by the recipient of his rights in respect of the office.

The difficulty which faced the Court of Appeal in that case was that there had been no express finding by the general commissioners as to the precise nature of the bargain made between the taxpayer and the company. But the Master of the Rolls, Sir Raymond Evershed - with whom the other members of the court agreed - was in no doubt that the payment was made in consideration of the director giving up his contractual rights. He said this, at page 360:

. . . I think beyond any question the bargain made in this case, and in the face of the pressure from the assurance society, was this: that Mr Henley was willing to submit to the pressure put upon him and to sever his connection with these companies altogether, not for nothing, but provided that certain sums which were already due and unpaid were paid, and also, that there should be paid as a lump sum a further sum of money as compensation or as consideration - which I think is the more accurate word - for his giving up altogether his contractual rights and ceasing entirely then and there to serve either of these companies as director, managing director or otherwise.

On that basis, the payment was properly to be regarded as if it were agreed or liquidated damages in respect of a termination in breach of contract - see per Lord Justice Somervell at page 367. Lord Justice Jenkins put the point in this way, at page 368:

. . . I think the necessary inference is that the bargain was to the effect that the Appellant should resign and that in consideration of his so resigning the company should make him this payment.

On these facts, the only possible conclusion of law in this particular case seems to me to be that the payment in question was not a payment of remuneration but was a payment made in consideration of the Appellant at the request of the company, giving up his right to continue to be employed by the company down to 31st March 1944, and to earn and receive his contractual remuneration down to that date.

In Dale v de Soissons , decided a few months later by a court of which Sir Raymond Evershed, Master of the Rolls, and Lord Justice Jenkins were again members (with Lord Justice Bucknill), the taxpayer was employed for a contractual term of three years from 1 January 1945; but the employer was entitled to terminate the employment at the end of the first or second year on payment of a sum described as compensation for loss of office. The employer terminated the employment as at 31 December 1945 and paid the prescribed sum (£10,000) to the taxpayer. The revenue assessed that sum to tax under Schedule E. This court upheld that assessment. Sir Raymond Evershed, Master of the Rolls observed, at page 126:

Cases of this character are never easy, and as Mr Grant observed at the end of his argument the line between those in which the taxpayer has succeeded and those in which he has failed may perhaps be described as “a little wobbly”, but in my view the learned Judge rightly held that this case fell on that side of the line which has been illustrated by, among other cases, the case of Henry v Foster and Hunter v Dewhurst , 16 TC 605, and not on the side of Henley v Murray , . . .

For my part, I have difficulty with the observation that Hunter v Dewhurst (as decided by the majority in the House of Lords) falls on the same side of the line as Henry v Foster . It seems to me that a true analysis would put Henry v Foster on one side of the line and Hunter v Dewhurst on the other side, with Henley v Murray . In Henry v Foster the payment was treated as an element of remuneration (albeit deferred) which had been agreed as a term of the contract of employment at the time when employment commenced; in both Hunter v Dewhurst and Henley v Murray the payments were treated as consideration for the release of rights to which (but for the release) the employee would have been entitled under the contract of employment. Be that as it may, it is clear from the judgment of the Master of the Rolls in Dale v de Soissons (with which the other members of the court agreed) that that was a case in which the court held that the payment was properly to be treated as an element of remuneration and not as consideration for the release of rights. He said this, at pages 127 and 128:

The burden of Mr Grant’s argument is that, according to its proper construction, you cannot say the £10,000, which in the event became payable when the option was exercised to terminate at 31st December 1945, was a payment or remuneration for rendering the services which Colonel de Soissons undertook to render under this agreement. Mr Grant says that it really represents, as a matter of principle as in the Henley v Murray case, in effect a sum paid in consideration for the cancellation of the rights under the agreement which Colonel de Soissons would otherwise have had. As I have already indicated, to my mind the correct answer is that given by Roxburgh J, namely, that this £10,000 was part of the remuneration which Colonel de Soissons was entitled to get under, and received from, his contract of service. The contract provided that he should serve either for three years at an annual sum or, if the company so elected, for a shorter period of two years or one year at the annual sum in respect of the two years or one year, as the case might be, plus a further sum, that is to say it was something to which he became entitled as part of the terms upon which he promised to serve, something which he was entitled to receive in the particular event specified, namely, the term not running the three years but being earlier determined. I agree with the learned Judge that there is a true analogy between this case and the cases to which I have referred, called Henry v Foster , where the taxpayer received sums by virtue of the article of association which were treated, for that purpose, as being part of the contract of service.

. . .

In the event, as it seems to me, the remuneration for the services took the form in part of a remuneration plus a commission for the period he in fact served, plus a further sum which he was contractually entitled to get under the terms of his agreement and as part of the bargain which he made.

To my mind there is a true analogy between Dale v de Soissons and the present case. In Dale v de Soissons the bargain, made at the commencement of the employment, was that the employee would be employed for a term of three years unless the employer, on payment of a sum of money, chose to terminate the employment at the end of the first or the second year. In the present case the bargain, again made at the commencement of the employment, was that the employee would be employed for a term which would continue for a period of six months after the employer gave notice of intention to dismiss; unless the employer, on payment of a sum of money, chose to terminate the employment within that period of six months. The fact that, in the one case, the payment was fixed at the outset while, in the other case, the payment would be fixed by reference to the salary at the time of termination is immaterial. In both cases the bargain made at the commencement of the employment was that the employee should have the security of employment - or the security of a right to continue receiving salary - for a given period; or that, in the alternative and at the option of the employer, the employee should receive an additional payment on termination. In both cases the employee was entitled to the additional payment, in the event which happened, in lieu of salary from continuing employment under the terms of the contract by which he had agreed to serve the employer.

I turn, now, to the decisions of the House of Lords since Dale v de Soissons . I have referred already to Lord Radcliffe’s formulation of the test in Hochstrasser v Mayes [1960] AC 376; a payment is assessable under Case I of Schedule E if it is paid to the employee in return for acting as or being an employee. The payment in Hochstrasser v Mayes was made under a housing scheme, operated by the employer, to compensate the employee for a loss which he had suffered on the sale of his house - the occasion of the sale being the need for the employee to relocate at the request of the employer. The assessment was set aside. The House of Lords was not satisfied that it had been established on the facts that the payment was a reward for the employee’s services - see per Viscount Simmonds at page 391, Lord Radcliffe at page 392 and Lord Denning at page 397. As Lord Radcliffe put it, at page 392:

The essential point is that what was paid to him was paid to him in respect of his personal situation as a house owner, who had taken advantage of the housing scheme and had obtained a claim to indemnity accordingly. In my opinion, such a payment is no more taxable as a profit from his employment than would be a payment out of a provident or distress fund set up by an employer for the benefit of employees whose personal circumstances might justify assistance.

In Laidler v Perry [1966] AC 16 the facts, as found by the special commissioners led to the opposite conclusion. The appellant, a salaried employee, was assessed to tax on the value of a £10 gift voucher given by the employer at Christmas. The special commissioners had found that:

The directors of the group followed this policy because the distribution of personal presents at Christmas time was one of several measures which help to maintain a feeling of happiness among the staff and to foster a spirit of personal relationship between the management and staff: the directors believing that a contented staff was a good thing in itself and likely to be of advantage to the group.

On that basis the vouchers were made available in expectation of future service and not as a gift. Accordingly they were taxable.

In Brumby v Milner [1976] 1 WLR 1096 the payment was by way of distribution on the winding-up of a profit sharing scheme. The House of Lords held that the recipient was taxable under Schedule E. As Lord Kilbrandon pointed out, at page 1101:

The sole reason for making the payment to the appellant was that he was an employee, and the payment arose from his employment. It arose from nothing else, as it would have done, if for example, it had been made to the employee for some compassionate reason. In such a case, as Lord Reid pointed out in Laidler v Perry , at pp.31-32, “the gift is not made merely because the donee is an employee”. There would be another reason personal to the recipient, namely his distress. There is no other such reason here.

The question in Bray v Best [1989] 1 WLR 167 was whether a payment made to an employee, after the termination of his employment on 1 April 1979 (and in the next tax year, 1979-80), out of a trust fund which had been set up for the benefit of employees of his former employer - and which, it was accepted, would be chargeable under section 187 of the Act of 1970 in respect of the year 1979-80 if not under section 181(1) of that Act in respect of earlier years - should be treated as attributable pro rata to each year of service and so chargeable under section 181(1) in each of the tax years from 1958-59 to 1978-79. It was accepted, in the light of Brumby v Milner , that the payment was properly to be regarded as an emolument from employment - see per Lord Oliver of Aylmerton at page 174G-H. The issue was whether, as an emolument from employment, the payment had necessarily to be attributable to some period or periods during which the employment had subsisted. The House of Lords, affirming the decision in this court, held that it was not necessary that an emolument from employment should be referable to any year of the employment. The special commissioner had held that the payment could not be attributable to any year other than 1979-80. Accordingly it could not be assessed under Case I of Schedule E in respect of any year during which the taxpayer had been in the relevant employment.

In Shilton v Wilmshurst [1991] 1 AC 684 a payment of £75,000 was made to the taxpayer, a professional footballer, by his former club, Nottingham Forest, on his agreeing to accept a transfer to Southampton. The House of Lords held that the payment was chargeable under Case I of Schedule E, as an emolument from the taxpayer’s employment with Southampton, notwithstanding that it had been made by a person who was not party to that contract of employment. I have already set out the passage in the speech of Lord Templeman in which he pointed out that a payment made as an inducement to enter into a contract of employment and to perform services in the future is an emolument from that employment for the purposes of Schedule E. As he put it, at page 689C-D: “an emolument ‘from employment’ means an emolument ‘from being or becoming an employee’”. He explained the application of that principle to the facts of the appeal in a short passage at page 691A-C:

In the present case Nottingham Forest paid £75,000 as an emolument in return for Mr Shilton agreeing to act as or become an employee of Southampton and for no other reason. Mr Shilton accepted the emolument of £75,000 in return for agreeing to act as or become the employee of Southampton just as he accepted £80,000 from Southampton for the same reason. The taxation consequences to Mr Shilton should be and are the same. Mr Shilton sought and obtained the aggregate sum of £155,000 for his agreement to enter the employment of Southampton. It did not matter to Mr Shilton whether the £155,000 was paid wholly or partly by Southampton or Nottingham Forest or some other third party.

I have thought it appropriate to set out a short analysis of the decisions of the House of Lords from Hochstrasser v Mayes [1960] AC 376 to Shilton v Wilmshurst [1991] 1 AC 684 in order to demonstrate that while there are, of course, useful statements of principle to be found in the speeches delivered in those appeals, none of those appeals required the House of Lords to consider, directly, the treatment of termination payments payable under the contract of employment. The question which arises in the present case - and which, to my mind, arose in Henry v Foster (1932) 16 TC 605 and in Dale v de Soissons (1950) 32 TC 118 - was not in issue in those appeals. I find nothing in those decisions of the House of Lords which suggests that the reasoning which led this court to its conclusions in Henry v Foster and Dale v de Soissons was wrong.

The taxpayer does, however, place considerable reliance on the most recent decision in the House of Lords, in Mairs v Haughey [1994] 1 AC 303. That was an appeal from Northern Ireland. The taxpayer had been employed by Harland & Wolff plc, a publicly owned firm of ship builders; and, in relation to that employment, had been entitled to contingent rights under a non-statutory enhanced redundancy scheme. In connection with a transfer of the business on privatisation and in consideration of giving up their rights under the enhanced redundancy scheme, employees were offered 30 per cent of the amount which they would have received under the scheme if they had been made redundant on 1 September 1989 (“element A”) and a further sum calculated by reference to years of past service (“element B”). In the case of the taxpayer the amounts were £4,506 and £1,300 respectively. The taxpayer accepted the offer and entered into contracts of employment with the new employer. The payment was made on 22 September 1989. The taxpayer was assessed under section 19(1) of the 1988 Act in respect of both elements. The special commissioner held that, although the payment (which combined elements A and B) was properly to be regarded as a single payment in consideration of the employees’ agreement to the package of changes, it was nevertheless permissible to appropriate element A to the loss of the enhanced redundancy scheme and element B to the acceptance of the new terms of employment. On that basis element B was chargeable as an emolument from employment on the ground that it had been paid in order to induce the taxpayer to enter into the new contract of employment; but element A was not chargeable - on the basis that it was the consideration for the employee giving up his contingent rights to an enhanced redundancy payment. The Court of Appeal in Northern Ireland took the view that that approach was consistent with the decision of the House of Lords in Tilley v Wales [1943] AC 386 and upheld the special commissioner. The House of Lords dismissed the Crown’s appeal.

Lord Woolf, with whose speech the other members of the House of Lords agreed, rejected what he described as the revenue’s primary contention - that the aggregate sum had to be regarded as paid by way of inducement to the employees to become or remain employed by the new employer. That made it possible to focus on what Lord Woolf described as the important issue raised by the appeal:

. . . whether a cash payment made for giving up non-statutory contingent redundancy rights is received by the employee as an emolument from his employment and chargeable to income tax under section 19 of the Act of 1988.

The revenue contended that, in law, a payment made to an employee under the enhanced redundancy scheme (unlike a statutory redundancy payment) would have been taxable as an emolument from his employment. That contention, whether or not correct in law, was inconsistent with a statement of revenue practice which had first been announced in 1981. But the House of Lords rejected the proposition as a matter of law - for the reasons given by Lord Woolf at pages 319E-322H. That was sufficient to dispose of the appeal, as Lord Woolf pointed out at page 323A-C:

The revenue’s next submission is that even though the redundancy payment to which the employees would have become entitled on becoming redundant, if their conditions of service had not been changed, would not have been an emolument from their employment, the sum paid to “buy out” this contingent entitlement was such an emolument.

It is impossible to accept this submission. As already indicated, payment made to satisfy a contingent right to a payment derives its character from the nature of the payment which it replaces. A redundancy payment would not be an emolument from the employment and a lump sum paid in lieu of the right to receive the redundancy payment is also not chargeable as an emolument under Schedule E.

That conclusion, as the phrase “already indicated” suggests, had been foreshadowed in an earlier part of Lord Woolf’s speech, at page 319D-E. In expressing concern at the apparent inconsistency between the revenue’s stated practice when dealing with non-statutory redundancy payments and the attempt to tax a payment genuinely made in lieu of the right to receive such payments, Lord Woolf had said this:

It is inevitable that if a payment is made in substitution for a payment which might, subject to a contingency, have been payable that the nature of the payment which is made in lieu will be affected by the nature of the payment which might otherwise have been made. There will usually be no legitimate reason for treating the two payments in a different way.

For reasons which I shall explain, each party to the present appeal seeks some assistance from those observations.

The revenue were, of course, faced with the difficulty in Mairs v Haughey that even if they had persuaded the House of Lords that, in law, a non-statutory redundancy payment was an emolument from employment chargeable to income tax under Schedule E, the House of Lords had decided, some sixty years earlier in Hunter v Dewhurst (1932) 16 TC 605, that a payment made to secure the release of a right to payments which would themselves be taxable (if received) was not an emolument from employment. The revenue invited the House of Lords in Mairs v Haughey to overrule its earlier decision in Hunter v Dewhurst . Although, as he recognised, it was unnecessary for him to do so, Lord Woolf considered that invitation at page 323C-H. While it may be possible to detect in his final observations less than unqualified support for the decision in Hunter v Dewhurst - which is, as it seems to me, difficult to reconcile with the principle (embraced by Lord Woolf at page 319D and at page 323B) that a “payment made to satisfy a contingent right to a payment derives its character from the nature of the payment which it replaces” - the invitation was not accepted. But, more pertinently in the present context, there is nothing in Lord Woolf’s speech in Mairs v Haughey which throws doubt on the decisions of this court in Henry v Foster (1932) 16 TC 605 or Dale v de Soissons (1950) 32 TC 118.

As I have indicated, each party to the present appeal seeks some assistance from the observations in Mairs v Haughey (at page 319D-E and at page 323B-C) that a payment in lieu takes its character from the nature of the payment which it replaces. It is submitted on behalf of the taxpayer that the payments in the present case replace the damages that would otherwise be payable in respect of a breach of contract consequent upon the termination of the contracts of employment with less than the agreed period of notice. So, it is argued, the payments in lieu are no more chargeable to tax under Case I of Schedule E than the damages which they replace would be. That argument would have force if the payments in lieu in the present case fell within the fourth of Lord Browne-Wilkinson’s categories in Delaney v Staples [1992] 1 AC 687, 692. But they do not. The payments fall within the second of those categories. I am not convinced that it is necessarily helpful to press the “replacement” principle too far in this field, where fine distinctions abound. But in so far as it is a useful guide; the better analysis in the present case, as it seems to me - and that for which the revenue contends - is to regard the payments in lieu as replacing the salary which the employee would have been entitled to receive if he had been given the full six months’ notice of the employer’s intention to terminate his employment. The salary would, of course, have been taxable under Case I of Schedule E.

The taxpayer seeks support, also, from the reasoning which led Lord Woolf and the other members of the House of Lords to the conclusion that redundancy payments made under a non-statutory scheme would not be chargeable to tax under section 19(1) of the 1988 Act. It was encouraged, perhaps, by the observation of the judge, in the present case, that the decision and reasoning in Mairs v Haughey “clearly give the company a powerful case”. For my part, I do not find any close analogy between a redundancy payment - the purpose of which, as Lord Woolf pointed out at page 320B-C, is (in part at least) to relieve an employee from the hardship consequent upon becoming unemployed - and a payment in lieu of notice. Notice of intention to terminate - or a payment in lieu of notice - is not intended to relieve the hardship consequent upon becoming unemployed. It is no substitute for a redundancy payment. Indeed, it is something to which the employee is entitled in addition to a redundancy payment - as the present case itself illustrates. Notice of intention to terminate - or a payment in lieu of notice - gives recognition to the obvious fact that it is likely to take time to find other employment; and that a prudent employee enters into employment on terms that, when the time comes for that employment to end, he will have the security of a continued right to receive his salary (or a payment in lieu) while he finds other employment.

I am satisfied, therefore, 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. In my view, for the reasons which I have set out, such a payment is an emolument from the employment. That was the view reached by the special commissioners and by the judge. I am satisfied that they were correct.

I would dismiss this appeal.

MR JUSTICE RATTEE: I agree.

LORD JUSTICE SIMON BROWN: I also agree.

ORDER: Appeal dismissed with costs; leave to appeal to the House of Lords refused.