England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE SPECIAL COMMISSIONER

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/08/2006

The Honourable Mr Justice David Richards :

1. This is an appeal by the Commissioners for HM Revenue and Customs (HMRC) from a decision of the Special Commissioner (Mr I.J. Ghosh) dated 29 December 2005 by which he allowed appeals against three notices of determination issued to the respondents in respect of the years 1997-98, 1998-99 and 1999-2000.
2. The determinations were made under regulation 49 of the Income Tax (Employment) Regulations 1993. They related to payments totalling approximately £6.5million made in March 1998 to pensioners who had retired from employment with Barclays Bank Plc (Barclays) on or before 31 December 1988. The payments were made by Barclays by way of compensation for the termination of an arrangement whereby a subsidiary of Barclays had previously offered to those pensioners a free service for the preparation of their annual tax returns. HMRC determined that "the employer" was liable to account for tax on the payments, on the grounds that they were benefits provided under a non-approved retirement benefits scheme within section 596A of the Income and Corporation Taxes Act 1988 (ICTA).
3. The Special Commissioner decided the appeal against HMRC on two grounds. First, he held that the determinations had been issued against the wrong party, with the consequence that he had no further jurisdiction in the matter. Secondly, and alternatively, the payments were not taxable under section 596A because they were not made in connection with the past service of the pensioners as employees of Barclays.

The facts

4. The facts are set out in detail in paragraphs 4 to 20 of the Special Commissioner's decision and may be summarised as follows. Prior to 1998 Barclays provided free assistance with the preparation of annual tax returns (the concessionary benefit) to pensioners, and their surviving spouses. This arrangement, provided from 1956 to widows of pensioners, had been extended in 1977 to pensioners themselves and their surviving spouses. An attempt in 1988 to withdraw the benefit had met with hostility from pensioners and trade unions and with threats of legal action. In March 1989 Barclays re-instated the benefit for pensioners who had retired, or accepted an offer of early retirement, on or before 31 December 1988 and their surviving spouses.
5. The tax service was provided by Barclays Private Taxation Service (BPTS), a wholly-owned subsidiary of Barclays. In 1997 Barclays was considering a sale of BPTS. One concern was the effect of a sale on the concessionary benefit. An analysis prepared at that time showed that in 1996, 7,874 pensioners had made use of the service, while 5,696 eligible pensioners or surviving spouses had not done so. The net present value of the future liability to provide the service was estimated at between £18.8 million and £32.4 million.
6. Barclays decided to proceed with a sale of BPTS and to withdraw the concessionary benefit. It would compensate all eligible pensioners, including those who had not made use of the service, on a sliding scale depending on 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 free use of the taxation service." Pensioners were notified in December 1997 of their individual proposed payments, which were made to them in March 1998. A total of £6,486,850 was paid to 13,521 pensioners.
7. 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 the payments were not made in consideration of any past services provided by pensioners who had been employees of Barclays but rather to compensate the pensioners for loss of the tax related services."

The legislation

8. The relevant obligation to deduct and account for income tax on income assessable under Schedule E arises under section 203 ICTA and the Income Tax (Employments) Regulations 1993. The regulations require an employer to deduct income tax "on the making of any payment or on account of any income assessable to tax under Schedule E". "Employer" is defined as any person paying emoluments and "emoluments" are defined to mean the full amount of any income to be taken into account in assessing liability under Schedule E.
9. At the time of the payments in question, the legislation which related to tax on benefits under a non-approved benefit scheme was contained in section 596A ICTA. The relevant parts provided:

"(1) Where in any year of assessment a person receives a benefit provided under a retirement benefit scheme which is not of a description mentioned in section 596(1)(a), (b) or (c), tax shall be charged in accordance with the provisions of this section.

(2) Where the benefit is received by an individual, he shall be charged to tax under Schedule E for that year."

10. The key provisions for the substantive issue arising on this appeal are in sections 611 and (in particular) 612 ICTA which provide, so far as relevant as follows:

"611 Definition of "retirement benefits scheme"

(1) In this chapter "retirement benefits scheme" means …a scheme for the provision of benefits consisting of or including relevant benefits…

(2) References in this Chapter to a scheme include references to a deed, agreement, series of agreements, or other arrangements providing for relevant benefits notwithstanding that it relates or they relate only to –

(a) a small number of employees, or to a single employee, or

(b) the payment of a pension starting immediately on the making of the arrangements

612 Other interpretative provisions

(1)…"relevant benefits" means any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or in anticipation of retirement, or in connection with past service, after retirement or death..."

11. Before the Special Commissioner, two issues were raised by the appellants (the respondents on this appeal). They were, first, whether there was a scheme within section 611 under which the payments to pensioners were made and, secondly, whether the payments were made "in connection with past service" within the meaning of section 612. On the first issue, the Special Commissioner held in favour of HMRC's case that there was a scheme and there is no challenge to that decision on this appeal. On the second issue, the Special Commissioner held that the payments were not made in connection with past service and, accordingly, were not relevant benefits within the meaning of section 612(1). This is the substantive issue which arises on this appeal.

Jurisdictional issue

12. What has been described as the jurisdictional issue arises because the determinations of liability to account for PAYE on the payments were made against the Trustees of the Barclays Bank Pension Fund (the Trustees), although they were served on Barclays as agent for the Trustees. The Special Commissioner held that the determination should not have been made on the Trustees, on the grounds that they were not "employers" for the purposes of ICTA or the 1998 Regulations and therefore have no liability in respect of the tax claimed by HMRC. He therefore allowed the appeal on this ground and stated that he had no jurisdiction to decide the substantive issues, arising under sections 611 and 612, although he went on to consider and decide them in case he was wrong on this first point. He reached this decision, notwithstanding the following matters. First, it was not a ground of appeal raised by the Trustees in their notice of appeal or in any other document or communication. Secondly, it was expressly disclaimed as a live issue by the Trustees in correspondence before the hearing. Thirdly, leading counsel appearing for the Trustees before the Special Commissioner stated, on instructions, that the Trustees did not take this point and accepted that, if income tax was deductible from the payments, the determinations had correctly been made against the Trustees.
13. As previously noted, the 1993 regulations provide that the person liable to deduct and account for income tax on emoluments is the "employer", defined as the person making the payments. It therefore raises a question of fact.
14. The question of the person on whom the determination should be made, Barclays or the Trustees, arose in correspondence between the Inspector and Barclays before the determinations were issued. As a result of the mechanics used for making the payments, there was some uncertainty as to whether it was Barclays or the Trustees which made the payments, although it is fair to note that Barclays then and later maintained that it made the payments. Although the determinations were issued against the Trustees, the uncertainty over the mechanics of the payments and the identity of the "employer" persisted. In correspondence, following the lodging of the appeal by the Trustees, HMRC sought disclosure of the relevant documents and made clear that in the absence of disclosure they would not agree a statement of facts as regards this point. The Trustees and Barclays amended the appeal form to name Barclays as well as the Trustees as the appellant and informed HMRC that they did not see this point "as a live issue". Correspondence continued further as to the details of the means by which and the person by whom the payments were made. In a letter dated 1 April 2005, Barclays' legal counsel (acting for both the Trustees and Barclays) wrote:

"For the record, and despite our providing you evidence of Barclays Bank Plc making the payment, it has never been explained why this point is of such crucial importance to the Inland Revenue. Given that both Barclays Bank Plc and the Trustees of the Pension Fund are parties to the action, the actual party making the payment is not, in our opinion, a live issue."

On that basis, HMRC agreed the statement of facts, which recorded that the payments were made directly by Barclays using the pension fund payroll and that they were not made by the Trustees or from the pension fund assets.

15. Consistently with the position that it was not a live issue, no point was taken in the appellants' skeleton argument for the hearing before the Special Commissioner that the determination had been made against the wrong persons.
16. At the hearing, and after making his submissions on the substantive issues, leading counsel for the appellants raised the issue. Counsel for HMRC protested and there was a short adjournment for the parties to consider their positions. The position when the hearing resumed, as set out in paragraph 26 of the decision of the Special Commissioner, was as follows:

"Mr Peacock, on reflection and after consultation with Ms Simler, conceded that the absence of a determination on plc did not deprive me of jurisdiction. Mr Peacock said that he was now aware that the Payments made to the Pensioners, although made by plc, were made "by or under" the Trustees in that the Trustees' payroll had been used by plc in making the Payments to the Pensioners. The Trustees were "employers" or alternatively "intermediaries" for the purposes of the PAYE regime, according to Mr Peacock. Thus the Barclays Bank Pension Fund had an obligation to account for monies which had to be deducted under the PAYE regime by reason of Regulations 40 and 41, if the Payments were within the scope of section 569A. A determination could therefore be made on the Trustee under Regulation 49. Mr Peacock therefore conceded that there was no fundamental issue on jurisdiction and undertook not to raise this point again should the matter go further. Ms Simler was content with this resolution of the jurisdiction point."

So far as the parties were concerned, that was the end of the matter. It was not contended by the Trustees that the determinations should not have been issued against them.

17. The Special Commissioner was, however, concerned. He states in paragraph 25 of his decision:

"The trouble is that this point goes to jurisdiction. If the determination is on the wrong party who has no liability then I have no jurisdiction to hear the substantive point at all. The Trustees' appeal would have to succeed. It follows that I must address this point."

18. He reviewed the evidence, such as it was, before him on the question of payment, stating at paragraph 28:

"Here, if plc had put the Trustees in funds and requested the Trustees to make the Payments to the Pensioners, the Trustees would be "employers" within TA 1988, section 203(1) and Regulation 2(1) of the Regulations. But the facts before me are that plc, having planned to make the Payments, done the work to calculate their quantum and communicated the fact that plc intended to make the Payments to the Pensioners, used the Trustees' payroll to make the Payments (by which I assume it is meant that the mechanism to pay the Payments to the Pensioners was the payroll usually used by the Trustees to pay pensions payments to the beneficiaries of the Barclays Bank Pension Fund Trust). The inference arises that plc simply requested the Trustees to deliver the Payments made by plc to the Pensioners in a convenient way." (emphasis added)

19. He concluded "on the facts of this case" that the Trustees were not "employers" for the purposes of the payments, and therefore had no liability in respect of income tax on the payments. He held that the Trustees' appeal therefore succeeded. He wrote on to explain:

"Thus it seems that Mr Peacock's concession cannot confer jurisdiction on me. The Trustees, on the facts of this case, are not "employers" for TA 1988 purposes or the purposes of the 1993 Regulations and have no liability under Regulation 49 of the 1993 Regulations. The Trustees' appeal therefore succeeds. I address the substantive point, however, in case I am wrong on the jurisdiction point. It would be wholly misguided of me to fail to consider the substantive point given that both Counsel accepted that I do have jurisdiction and that this matter may well go further. I have had to consider the jurisdiction point, despite Mr Peacock's concession since if I am correct about the jurisdiction point, jurisdiction cannot be conferred on me by concession. And there is at least the prospect of this matter going further and the jurisdiction point only emerging before a higher Court which takes the point of its own motion."

20. It is, of course, correct that parties cannot by agreement confer on a statutory tribunal jurisdiction which it does not posses under the terms of the statutes which govern it.
21. However, with respect to the Special Commissioner, I consider that he was in error in proceeding as he did. First, it was not in my judgment a jurisdictional issue. He had jurisdiction to deal with the issues raised by the appellants on their appeals against the determinations. In fact, he did so, in case he was wrong on the question as to whether the Trustees were the employers. Whether the Trustees were the employers was an issue which could arise for decision on an appeal and which, if it did arise, would have to be decided along with the other issues raised. It could be regarded as a threshold issue, in the sense that if it was correct, it would follow that the appeal against the determination would succeed, whatever the merits on other points. But it was not a threshold issue going to the Special Commissioner's jurisdiction to consider those other points.
22. Secondly, and more importantly, the nature of the issue was such that the Special Commissioner should not have considered and decided it, in the face of the clear concession made on behalf of the Trustees. It was in part a question of fact. Because it was not an issue on which the Trustees based their appeal, as their concession at the hearing confirmed, the parties did not direct their evidence before the Special Commissioner to this issue. The statement of facts as it related to the payments was agreed expressly on the basis that no issue arose, and the statement made by counsel for the appellants at the hearing was to the effect that the mechanics were such that it could be said that the payments were made "by" the Trustees as employers for the purposes of the PAYE regime.
23. For these reasons, there had been no investigation of the mechanics of payment, either through the disclosure of documents or through cross-examination. Additionally, if this had been an issue between the parties, HMRC would have sought to rely on section 114 of the Taxes Management Act 1970, under which certain types of mistakes do not invalidate an assessment or determination.
24. Accordingly, the Special Commissioner should not have embarked on the process of finding the facts necessary in order to decide an issue not raised by the parties. The lack of a proper evidential basis for doing so appears from paragraph 28 of his decision. He relies in part on an assumption made by himself and concludes with an inference where, if the matter had been in issue, he would have had the benefit of direct evidence.
25. In my judgment, on a matter involving potentially disputed issues of fact, the Special Commissioner was not entitled to go behind the Trustees' concession and seek to decide the matter. It was an error of law for him to do so. This would be so, even if it had involved a question of jurisdiction. However, in this case, it did not do so for the reasons given above.
26. There could be cases where a tribunal was troubled about a concession which a party had made or was proposing to make. This might particularly be so where the party did not have the benefit of proper professional advice. In such a case, the tribunal might well invite the party to consider carefully its position. If the party maintained its position, it would not be for the tribunal to insist on pursuing the issue. If, however, the concession was withdrawn or not made, the tribunal would need to consider whether procedural fairness required an adjournment to enable the other party, or perhaps both parties, properly to prepare the case and obtain the necessary evidence. In this case, however, such issues did not arise, with commercially sophisticated appellants represented by leading counsel.
27. I should say that on this appeal the respondents, while drawing my attention to matters which I might wish to consider, have abided by the undertaking recorded in paragraph 26 of the decision of the Special Commissioner not to raise the "employer" point on appeal. Their position, as stated in Mr Peacock's skeleton argument, is as follows:

"The Respondents accepted HMRC's view that if there were a tax liability, the determination could be made on the Trustees rather than the Bank. They do not seek to draw back from their acceptance of that view, nor do they seek to take any advantage of HMRC's present position. The Respondents stand by their admission that the use of the Trustees' payroll was sufficient to cause the payments to have been made by the Trustees for the purposes of the 1993 Regulations. They are quite content to fight the matter on the substantive issue."

28. My conclusion on this issue makes it unnecessary to consider a broader submission made on behalf of HMRC that it is not open to the Special Commissioners to allow any appeal on a point not relied upon by the appellant, whether or not it involves any issue of fact. I express no opinion on this submission.

Substantive issue

29. The only substantive issue arising on this appeal is whether the payments were "relevant benefits" within the definition contained in section 612(1) ICTA. The definition includes "lump sum" and "gratuity", which are clearly apt to include the payments in this case. The only issue is whether they were made "in connection with past service". It is common ground that they need not have been in consideration of past service.
30. Before the Special Commissioner, the Trustees contended that the payments were not made in connection with past service, but rather in connection with the withdrawal of the concessionary benefit. They accepted that the concessionary benefit was connected with past service.
31. The Special Commissioner held that the payments were not made in connection with past service, within the meaning of section 612(1). He dealt with the issue as paras 68-71 of his decision:

"68. The Payments are not "relevant benefits". The Payments were not given "in connection with [the] past services" of the Pensioners who had been employees of plc (or, I suppose, related companies). The Payments were certainly not consideration for the past services of past employees. Neither party has suggested otherwise. The Payments were made to assuage the perceived hostility of the Pensioners and the trade unions who represented them. Although the Payments would not have been made "but for" the past services of those former employees who were Pensioners, the Payments were motivated by and paid by reason only of the wish of plc to avoid the consequence of such hostility.

69. I accept that the term "in connection with" does not pose a causal test. Contrast the terms "by reason of" [employment] and "therefrom" [that is, "from" an employment] which were the terms in issue in Wilcock v Eve (supra). These latter terms clearly postulate a causal test. They ask whether the employment relationship caused, that is, gave rise to, the receipts under scrutiny.

70. The phrase "in connection with" is much wider. This phrase does not pose a causal test. So authorities such as Wilcock v Eve are of no assistance. Rather the phrase "in connection with" simply asks whether there is a link ("connection") between past services and the benefits referred to in Section 611(1). The test is one of fact and degree. However, it is not limitless. The quality and strength of the nexus which must be satisfied to establish the requisite "connection" between two items depends on the context of the statutory provision which is being construed. Here Section 612(1) which defines "relevant benefits" is defining "benefits" which have a sufficient connection to "past services" of employees to be characterised as effectively deferred emoluments (using the language of Schedule E).

71. In this case the Payments had no relevant "connection" to the past services of former employees other than those past services informed the class of beneficiaries of the trust of the Barclays Bank Pension Fund. The Payments were not any form of reward for those past services. They were paid to former employees and widows and widowers of former employees alike. The Payments were calculated, as Mr Peacock points out, by reference to the complexity of tax affairs, the age of the recipient of the tax services and the extent to which they used the services, without any reference to past services. All of these factors point the same way. The Payments were not in any sense deferred rewards for past services. It follows that the Payments are not "relevant benefits". It further follows that the Payments are not made "under" a "retirement benefits scheme" in this case."

32. HMRC contend that the decision on this point was an error of law and/or perverse. They support the reasoning at paragraphs 69-70 that the term "in connection with" does not pose a causal link, but is wider and simply asks whether there is a link between past service (not, however, "past services", as is stated in these paragraphs) and the payments. They submit that the Special Commissioner erred in law in introducing a requirement that the payments must "have a sufficient connection to past services of employees to be characterised as effectively deferred emoluments (using the language of Schedule E)" and in rejecting the case that they were relevant benefits because they "were not any form of reward for those past services" and "were not in any sense deferred rewards for past services". HMRC object that this involves reading into the definition a qualification or characteristic which is not to be found in it, whether expressly or by necessary implication. Neither side had contended that the payments were rewards for past service.
33. HMRC submit that the proper approach is to consider the nature of the payment and the context in which it was made. The payments were in substitution for the concessionary benefit which was given only to retired employees and their surviving spouses and was clearly given in connection with past service. The payments were made to retired employees or their surviving spouses in their capacities as such. The fact that the amount of the payments payable to each person was calculated not by reference to any aspect of their past service but by reference to the use which they had made of the service, the complexity of their tax affairs and their age was immaterial. The essential point was that the payments were made only to retired employees in substitution for a benefit connected with their past service. In this context, it was relevant that all eligible pensioners received a payment, even if they had never used the service.
34. Mr Peacock for the Trustees supported the Special Commissioner's decision and reasoning. The relevant connection was "past service" as an employee of Barclays, not simply his or her past status as an employee. It focuses on the service which he or she provided as an employee. The phrase "in connection with", though broad, was not limitless in meaning. Its meaning was to be derived from and limited by its statutory context. The required connection with past service, which involved a reference to the pensioner's past efforts as an employee, showed that the Special Commissioner was right to limit relevant benefits to those which were effectively deferred emoluments.
35. Mr Peacock submitted that the payments were made in compensation for the loss of the tax service, which was of itself sufficient to sever any connection with past service. In any event, the payments were entirely divorced from connection with past service, as demonstrated by three matters. First, the calculation of the payments was unrelated to the length or value of service provided to the Barclays group. Secondly, the calculation was by reference to, among other things, the use made of the service. Thirdly, payments were made to surviving spouses, who had never worked for the Barclays group, and their payments would reflect their own past use of the service.
36. Mr Peacock also submitted that the question was not whether the benefit was in connection with past service, but whether it was given in connection with past service. This gave rise to a number of questions. First, what was the motive for giving the payment? In this case, as found by the Special Commissioner, it was a combination of moral duty and a desire to avoid trade union hostility. Secondly, what was its purpose? As was common ground, it was given as compensation, or in substitution, for the free tax service. Thirdly, how were the payments calculated? Again, as was common ground, it was by reference to factors unconnected with the length or value of past service. Fourthly, to whom was the payments given, to which the answer is a class of former employees and their spouses by reference to retirement before 1989. If these questions are examined, it can be seen that the only link which the giving of the payments has to past service is that the recipients are partly defined as former employees who retired before 1989.
37. In my judgment, Miss Simler for HMRC is right in her submission that the Special Commissioner misconstrued section 612(1), and therefore made an error of law, when he held that for a payment to be given in connection with past service it had to be effectively deferred rewards for past service. It is not a requirement which can be spelt out of the definition of "relevant benefits". All that is required is "any pension, lump sum, gratuity or other like benefit given…in connection with past service". The words "lump sum, gratuity or other like benefit" do not carry a necessary connotation of a deferred reward; if anything, they suggest that the benefit need not be a reward.
38. The words " in connection with" are probably as broad a formulation as will be found in statutory provisions for linking A with B. It is a question of fact whether a connection exists within the meaning of the statutory provision in question. In section 612(1) nothing more is required than the payment should be given in connection with past service. The relevant facts are not here in dispute. Where, as here, the free tax service was provided to retired employees and their spouses, because they had been employees or were married to retired employees, it is to my mind clear that the service was provided in connection with past service.
39. Likewise, where a lump sum is paid in substitution for the free tax service and by way of compensation for its termination, it is in my judgment paid in connection with the past service to which the free tax service was connected. This does not involve the fallacy suggested by Mr Peacock of concluding that simply because B is given in connection with A and C is given connection with B, C is given in connection with A. The critical feature in this case is that the payments were a substitute for the free tax service.
40. I do not accept that there is a significant distinction to be drawn, as Mr Peacock suggested, between payments in connection with past service and payments "given" in connection with past service. In particular, I do not consider that the statutory wording requires the payments to have been calculated by reference to past service, rather than to other factors such as the use made of the service, all the more so as here all eligible pensioners were to receive some payment. I agree also with Miss Simler that it is significant in this context that the phrase in section 612(1) is past service, not past services. "Service" means "service as an employee of the employer in question" and in my judgment it carries no connotation of the length or value of such service.
41. I conclude therefore that the Special Commissioner misdirected himself as to the construction of the definition of relevant benefit in section 612(1). Properly construed, and applied to the undisputed facts of this case, I conclude that the payments were given in connection with past service and that they were therefore relevant benefits provided under a retirement benefit scheme and chargeable to tax under section 596A ICTA. There are no further facts to be found and no purpose would be served by remitting the case to the Special Commissioner.

Conclusion

42. The appeal is allowed and a decision that HMRC was entitled to make formal determinations of tax payable by the Trustees under regulation 49 of the 1993 Regulations in respect of the payments is substituted for the decision of the Special Commissioner.