England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THE HIGH COURT OF JUSTICE (CHANCERY DIVISION)
DAVID RICHARDS J
[2006] EWHC 2118 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		11th May 2007

LADY JUSTICE ARDEN:

1. Before 1998, Barclays Bank plc ("Barclays") provided or offered to provide to some of its pensioners and their surviving spouses free assistance from one of its subsidiaries, Barclays Private Taxation Service Ltd ("BPTS"), in preparing their annual tax returns. I will refer to this as "the free tax service". It was a concessionary benefit and it was not regarded by Barclays to be as itself taxable because it was paid in kind. In 1997 Barclays decided to terminate this benefit and made special one-off cash payments to compensate pensioners concerned for the loss of this benefit. The issue on this appeal is whether those payments are taxable as a " relevant benefit" provided under a "retirement benefits scheme" by virtue of s. 596A of the Income and Corporation Taxes Act 1988 ("ICTA"). We are concerned with the legislation as it stood as at March 1998. For the purpose of the relevant definitions, the payments are taxable if they constituted payments "in connection with past service".
2. If the one-off payments are taxable, then, in the normal course, the recipient would be liable to tax under schedule E, but in this case Barclays has agreed to bear the charge to tax (at the basic rate). As we understand it, no recipient will be asked to pay any further tax due on these payments if tax is due. The trustee of the scheme is also an appellant but, although a jurisdictional point arose before the Special Commissioner, no such point arises on this appeal. I will therefore proceed as if the Barclays were the sole appellant.
3. A "retirement benefits' scheme" is defined by s. 611(1) of ICTA as (so far as material) "a scheme" for the provision of benefits "consisting of or including relevant benefits". References to a "scheme" in this context "include references to a deed, agreement, series of agreements, or other arrangements providing for relevant benefits…" (s 611(2); the remainder of that subsection is not relevant). Accordingly, relevant benefits must be provided pursuant to pre-existing arrangements but on the face of it at least there is no need for those arrangements to be in a formal document or to be in a document that could be described as a pension trust deed. Section 611(1) and (2) both use the term "relevant benefits" and to find the meaning of that term, one must go to the crucial definition of "relevant benefits" in s. 612(1):

"relevant benefits' means any pension, lump sum, gratuity or other like benefit given or to be given on retirement or death, or in anticipation of retirement, or, in connection with past service, after retirement or death, or to be given on or in anticipation of or in connection with any change in the nature of the service of the employee in question…"

4. For completeness, I note that s 612(1) defines "service" as an employee of the employer in question, but nothing turns on the definition on this appeal.
5. The Special Commissioner (Mr I.J.Ghosh) acceded to the appeal from the assessment levied by Commissioners for Revenue & Customs ("the Revenue"). He held (so far as material) that the one-off payments had not been made "in connection with past service" and that they were therefore not relevant benefits within s.612(1) of ICTA. However, the Revenue succeeded on an appeal from the Special Commissioner to David Richards J.
6. Before I turn to the issues that have been argued on this appeal, I need to set out a little more of the background and to refer to the findings of the Special Commissioner.

Background

7. The free tax benefit was originally provided to the widows of pensioners alone but the arrangement was extended in 1977 to pensioners as well as their surviving spouses. Barclays conceded that the benefit was given "in connection with past service". Barclays attempted to withdraw the benefit in 1988 but this met with hostility from pensioners and trade unions and threats of legal action. In March 1989 the benefit was reinstated for pensioners who had retired, or accepted an offer of early retirement, on or before the 31 December 1988 or their surviving spouses.
8. In 1997, in anticipation of the sale of BPTS, Barclays decided to withdraw the free tax benefit. It decided to compensate all eligible pensioners (or, if deceased, their estates), including those who had not made use of the service. The compensation was calculated on a sliding scale and this took account of the use which they had individually made of it. In September 1997, eligible pensioners were notified of the proposed sale in a letter from Barclays, which stated that it intended to make "as a gesture of goodwill…special one-off cash payments to all those currently eligible to make use of the free taxation service." Pensioners were notified in December 1997 of their proposed individual payments, which were made to them in March 1998. A total of £6,486,850 was paid to 13,521 pensioners. It is accepted that each of the payments would constitute "a gratuity" for the purpose of the definition of "relevant benefits". Alternatively it would constitute an "other like benefit" for the purpose of the definition.
9. The Special Commissioner made the following findings of fact:

"(i) The payments were motivated by a combination of moral duty and a commercial desire to avoid hostility of the trade unions;

(ii) The payments were calculated on a planned, commercial basis, by reference to the complexity of the tax affairs of the pensioners;

(iii) The calculation of the payments was completed on a careful basis and only after considerable work and intense activity.

(iv) In so far as it is a question of fact I find that the payments were not made in consideration of any past services provided by pensioners who had been employees of plc but rather to compensate the pensioners for loss of the special tax related services."

10. The Special Commissioner found that the one-off payments were made to avoid perceived pensioner and trade union hostility. The Special Commissioner accepted that the one-off payments would not have been made "but for" the past services of the former employees who were pensioners, and that the term "in connection with" did not pose a causal test in the sense that phrases such as "by reason of" did. He held that the phrase "in connection with" simply asked whether there was a link between the past services and the benefits in question. He held that the test was one of fact and degree and that the quality and strength of the nexus depended on the context of the definition of relevant benefits. In his opinion, that definition involved benefits which had a sufficient connection to past services of employees to be characterised as effectively deferred emoluments. The Special Commissioner then examined whether on the facts of this case the one-off payments had any relevant connection to the past services of former employees. He considered that the past services of former employees informed the class of beneficiaries. However, the payments were not in fact any form of reward for those past services. They were paid not only to former employees but also their widows and widowers. The payments were calculated by reference to the complexity of their tax affairs, the age of the recipient and the extent to which they used the services without any reference to past services. He concluded that the payments were not in any sense deferred rewards for past services and that accordingly the payments were not "relevant benefits".
11. The judge concluded that the Special Commissioner had misconstrued s 612(1) when he held the payment, to be given "in connection with past service", had effectively to be a deferred reward for past service. He held that that was not a requirement. He held that the words "in connection with" were broad. He held that it was a question of fact whether any connection existed within the meaning of s 612(1). In his judgment it was clear that the service had been provided in connection with past service. He then went on to deal with the one-off payments and held that, since they were paid in substitution for the free tax service and by way of compensation for its termination, they were paid in connection with the past service to which the free service was connected. The critical feature in his judgment was that the payments were a "substitute" for the free tax service.
12. The judge did not accept that it was significant in any way that the payments were required by the statutory definition of "relevant benefits" to be "given" in connection with past service. Nor did he consider that the statutory definition required the payments to have been calculated by reference to past service rather than to factors such as the use made of the service. He also held that it was significant that the statutory definition referred to "service" and not to "services". The Special Commissioner had used those words as if they were interchangeable. In the judgment of the judge, the Special Commissioner misdirected himself as to the interpretation of "relevant benefits". The proper conclusion on the facts was that the payments were given in connection with past service and that they were therefore "relevant benefits".
13. The area now in dispute is very narrow. Mr Jonathan Peacock QC for Barclays accepts that the arrangements for making the one-off payments constituted a scheme, but submits that those payments were not "relevant benefits" because they were not paid "in connection with past service". The theme of his submissions is that the presence or absence of the necessary connection required by the definition of "relevant benefits" depends on the context. All the circumstances have to be taken into account
14. Mr Peacock relies on the legislative context. He points out that there is a symmetry in the charging provisions. In the case of certain schemes, namely exempt approved schemes and exempt statutory schemes (as defined in ss. 592 and 594 of ICTA respectively), the employer's contribution to a pension scheme is tax deductible and no tax is charged on the payments out of the scheme. In the case of other schemes, contributions are in general treated as income of the employee but he is not chargeable to tax on any pension or (in some cases) any lump sum he receives from the scheme. Here there was no matching contribution pension scheme when the free tax services were provided.
15. Mr Peacock further submits that, in the context of pension schemes, the common thread running through all the scheme of the relevant chapter (Chapter 1 of Part XIV) of ICTA is that the payment sought to be taxed must in some sense be a reward for service. It need not be a contractual entitlement, and indeed in this case Barclays did not enter into any binding arrangement with employees to provide a free tax service. The reward can be a deferred reward which the employer or administrator of the scheme agrees to give only after retirement. On Mr Peacock's submission, the definition of "relevant benefits" is intended to encapsulate the benefit which is a reward for service as an employee.
16. As to the factual context of the present case, Mr Peacock submits that the proper inference from the facts as found by the Special Commissioner is that the payments in compensation for loss of the free tax service were not in any sense a reward for service. The sums were, for example, paid to surviving spouses, who had never worked for Barclays. That suggested that the amounts were not being paid in connection with past service. The sums were not calculated by reference to the value or length of service. The sums were paid according to the life expectancy and the complexity of the tax affairs of the person who used the service and the complexity of his tax affairs. These factors also indicated that the sums were not being paid in connection with past service. The Special Commissioner was not in error in looking for an element of deferred reward. That he thought was the crucial element of the context in this case. The judge erred because the mere fact that there was a link between the one-off payment and the free tax service was not enough to link the one-off payment to the employee's service with Barclays. The judge was also wrong to speak of the payment as being "in substitution for" the free tax service. That was not a correct description. It was compensation rather than a payment taking the exact place of the free tax service that preceded it. The judge correctly accepted that the question of whether the necessary connection existed was one of fact. Since there can only be an appeal from the Special Commissioner on a point of law, it followed that the judge was not entitled to substitute his own conclusion unless there was no other conclusion to which the Special Commissioner could come. If the court considered that the judge was correct to set aside the decision of the Special Commissioner, but that a decision adverse to the taxpayer was not inevitable, it should remit the case back to the Special Commissioner.
17. Mr Peacock's further submission is that the one-off payments for termination of the free tax service were not "relevant benefits" because they did not confer "any retirement-type benefit". Mr Peacock relies on the dictum of Lord Hoffmann in MacDonald (Inspector of Taxes) v Dextra Accessories Ltd [2005] STC 1111 at [18] that, where a statutory definition is ambiguous, the choice of the term to be defined may throw some light on what the words in the definition themselves mean. Thus Mr Peacock submits that the other terms used in the definition of "relevant benefits", and the use of that expression in the definition of "retirement benefits scheme", indicate that the context is wholly one of an occupational pension scheme, that is, a scheme where employees were rewarded by a pension or otherwise, for past service. The anomalous result of the judge's conclusion is that tax is chargeable on the pensioners themselves even though there is no element of reward and the recipients are pensioners under an exempt approved scheme (or their estates). The particular scheme found by the judge could have existed without any retirement benefits scheme in the usual sense.

Discussion and conclusions

Primary submission: "in connection with"

18. The primary question in this case is the proper meaning of the words "in connection with past service" in section 612(1) of ICTA. The expression "in connection with" could describe a range of links. In Coventry Waste Ltd v Russell [1999] 1 WLR 2093 at 2103, Lord Hope held that in this situation the court must look closely at the surrounding words and the context of the legislative scheme:

"The majority in the Court of Appeal held that it was a sufficient answer to the appellant's argument to construe the words "in connection with" as meaning "having to do with". This explanation of the meaning of the phrase was given by McFarlane J in Re Nanaimo Community Hotel Limited [1944] 4 D.L.R. 638. It was adopted by Somervell L.J. in Johnson v. Johnson [1952] P. 47, 50-51. It may be that in some contexts the substitution of the words "having to do with" will solve the entire problem which is created by the use of the words "in connection with." But I am not, with respect, satisfied that it does so in this case, and Mr. Holgate did not rely on this solution to the difficulty. As he said, the phrase is a protean one which tends to draw its meaning from the words which surround it. In this case it is the surrounding words, when taken together with the words used in the 1991 Amending Order and its wider context, which provide the best guide to a sensible solution of the problem which has been created by the ambiguity."

19. Accordingly, the other parts of the definition of "relevant benefits" and the surrounding provisions of the legislative scheme, will inform the court as to the extent of the link required by any particular provision. Thus the court must examine the function or purpose of the definition of "relevant benefits". Here, the purpose of the definition is to identify the chargeable payments under a retirement benefits scheme. At the very least, Parliament is unlikely to have intended to limit connections to direct connections. That would have left the possibility that taxpayers could easily circumvent the charging provisions. Furthermore, it must have been foreseen that, over the life of the scheme, changes might be made to benefits. The changes would not simply involve a straight exchange or substitution of one benefit for another, but, on occasion, the loss of a benefit and the rendering of some monetary recompense. The charging provisions could only fairly apply if they applied to the giving of the new benefits, or recompense, as much as to the giving of the benefit originally provided by the scheme. It is also significant that Parliament did not limit itself to payments in consideration for services.
20. Thus I conclude that a connection may be indirect for the purpose of the definition of relevant benefits. Accordingly, it is possible that the making of a payment will have a relevant connection with more than one thing. In that situation, it is in my judgment necessary to see whether the connections can co-exist, or whether one will actually exclude the other. If, on proper analysis the further connection displaces a prior connection, the prior connection ceases to be a relevant connection for the purpose of s.612(1).
21. Mr Peacock emphasises that although the recipients of the one-off payments were chosen because of their connection with their pension scheme, their status is simply one of the relevant surrounding circumstances to be taken into account. But, in my judgment, once that status is shown, it is rare to find that the connection is displaced. It may assist to take an example. If a company is in the practice of sending Christmas hampers to its pensioners as a gesture of goodwill, there would be a connection between the hampers and past service. The recipients are chosen solely on the grounds of past service. If in a subsequent year the company decides to substitute a cash payment for the hamper, the cash payment takes the place of the hamper and therefore is connected with past service.
22. It is difficult to think of a case where a benefit made available to persons chosen for their connection with an occupational pension scheme is not given in connection with their service. To take another example, suppose that the company, without any obligation to do so, decides one year as a one-off event to invite pensioners to an evening at a hotel at which it conducts a quiz. The winners of the quiz are given cash prizes. The pensioners are invited because of their link through past service with the company. However, when they win cash prizes, they are given for their performance in the quiz. The winning of the prize is random so far as the company is concerned and prizes are given in the spirit of gamesmanship. The participation of the recipient is voluntary. In that situation, the link with past service may be found to have been displaced. But this must be a rare case. It demonstrates that, once recipients have been chosen by the employer or trustee of the scheme for their connection with the scheme, the presence of that link is unlikely to be lost and the court must give that factor, that is the criterion for selection of those entitled to receive the one-off payments, great weight.
23. The definition of "relevant benefits" is not, however, unbounded. There must be a link with service. In addition, in my judgment, the expression "give" is important. In this respect I differ from the judgment of the judge. That word creates a requirement for the maker of the payment to have known the facts constituting the link with past service. It does not, however, assist Mr Peacock's argument, because it does not entail any subjective requirement on the part of the maker of the payment for the payment to be linked with the reward for service.
24. The Special Commissioner thought that it was necessary to find that the payment was in fact a deferred reward. In my judgment, this imposed a gloss on the definition. The gloss was unjustified because the expressions "pension" and "gratuity" do not entail any necessary element of reward and so the expression "other like payment" cannot do so either. As Miss Ingrid Simler QC, for the Revenue, points out, a pension is not an emolument (see Wales v Tilley (1945) 25 TC 136), and there is a separate charging provision for the deferred emoluments (s 19(4A) of ICTA). Moreover he was wrong to talk in terms of "services" as opposed to "service" and this error may have led him to seek to find some link between the payment and a reward for services. In my judgment, with respect to the Special Commissioner, the decision to which he came was on the facts a strained one.
25. Mr Peacock's submission is that the one-off payments were strictly compensation for the free tax service and not in substitution for it. The one-off payments certainly served a different function from the free tax service, and in that sense, they were not in substitution for it. However, nothing turns on this point because the expression "in connection with past service" covers payments that are indirectly connected with past service as well as those which are directly connected with it. Because the expression "in connection with" is wide enough to include indirect connections, it is no answer to say that the benefit was given for the loss of the free tax service. That did not prevent it from also being in connection with past service.
26. I return to the facts. I agree with Mr Peacock that all the relevant circumstances must be taken into account, but it does not mean that all the facts must be given the same weight. In this case, the class of recipients was limited to those who had been employees or who had connections through an employee by being the surviving spouse or personal representatives. No one else could come within the class. As I have said, the criterion for selection of the recipients is a strong factor to which, in my judgment, substantial weight should be given. The other facts emphasised by Mr Peacock, such as the calculation of the one-off payments by reference to the age of the recipients and the complexity of their tax affairs, are subsidiary matters which are secondary to the selection of the class of recipients. In my judgment the judge was right to say that there was a connection here between past service and the giving of the payment. The free tax service had clearly been provided because the pensioners were former employees. That link continued through the paying of compensation. The reason for paying compensation was to compensate them for loss of the benefit that they had previously enjoyed in connection with past service. Once the added element that the payment had to be a form of reward for past service is discounted and removed, an overall assessment of the facts in this case, far from supporting Mr Peacock's submissions, is against it.

Alternative submission: "relevant benefits" in the context of a "retirement benefits scheme"

27. Mr Peacock's alternative case requires the court to look at the definition of a "retirement benefits scheme" as providing the context for "relevant benefits" and to hold that Parliament contemplated that there would be no such benefit without some element of reward. In my judgment, the definition of "relevant benefits" is very wide and not limited to such payments. It includes, for instance, a gratuity or other like benefit. Furthermore, there is no necessary reason why a gratuity should be related to the past service. It might be to compensate the pensioner for something else altogether, such as loss suffered as a result of illness. Moreover, as already explained, a pension is not an "emolument". Accordingly, the definition of "relevant benefits" cannot be said to import any necessary connotation that the benefit must be some form of emoluments from employment.
28. In consequence, provided that there is a link between past service and the giving of the one off payment there is no reason why the payment has to be under an occupational pension scheme or to have the character of a reward for service. That necessarily means that the application of section 596A is wider than it appears at first glance but (as I have said) a limitation is imposed by the requirement that the gratuity be "given" and the need for some "connection with past service". The word "given" in my judgment imports a requirement that the person making the payment should know the facts that constitute the necessary connection between the payment and the past service. It does not, however, even when appearing with the expression "in connection with past service", import any requirement that there should be an element of reward.
29. As I have said, this case produces the conclusion that a scheme that is not an occupational pension scheme in the conventional sense can constitute arrangements for the provisions of "relevant benefits". This case may for that reason be one of those cases where the decision of this court will run contrary to what practitioners in this field had anticipated. Mr Peacock has referred the court to the dictum of Lord Upjohn in R v Schildcamp [1971] AC 1 at 23:

"The task of the court is to ascertain the intention of Parliament; you cannot look at the section, still less a subsection, in isolation, to ascertain that intention; you must look at all the admissible surrounding circumstances before starting to construe the Act."

30. There is no doubt that the court should, when interpreting a statutory provision, examine not just that provision but also the context in which it appears in the legislation in question. It may then be able to form a view as to the purpose of the provision in question and that knowledge may inform its thinking as to the choice of meaning to be offered where choices are available. The context of the provision in question, however, will not of itself justify the court in limiting the provision to that context, and thus reducing its apparent scope, unless there is some indication in the legislation that this is what Parliament intended. The effect of Mr Peacock's submission, is that the court should read down the definition of "relevant benefits" to conform with the concept of a conventional "retirement benefits scheme". In my judgment, there is nothing in the legislation to justify this course. Indeed, the indications are the other way. Parliament has used a broad expression, namely the expression "in connection with". Having cast the net widely, Parliament has drawn it in particularly by imposing a limit that there should be a connection with service. The limitations prescribed by Parliament are the limitations that the court should apply. The context of occupational pension schemes cannot be used to narrow the phrase "in connection with past service" yet further.

Disposition

31. In my judgment, the Special Commissioner misdirected himself as to the meaning of the expression "in connection with past service". There is no appeal from the Special Commissioner's findings of fact, but the question what that expression meant and whether the facts as found by the Special Commissioner were capable of satisfying the meaning were questions of law. On the facts as found by him, there could be only one conclusion, namely the conclusion that the giving of the one-off payments was in connection with past service. The weight to be given to the criterion adopted for selection of recipients of the one-off payments is not displaced by any other fact in this case and makes it inevitable that the appeal to the Special Commissioner, and to this court, must fail. In those circumstances, this appeal should be dismissed and an order should be made that the one-off payments were "relevant benefits" for the purpose of s 612(1) of ICTA. There is no need for any matter to be remitted to the Special Commissioner.

Lord Justice Scott Baker:

32. I agree.

Lord Justice May:

33. I also agree that this appeal should be dismissed for the reasons given by Arden LJ.