First-tier Tribunal (Tax)

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Cite as: [2009] UKFTT 140 (TC)

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[2009] UKFTT 140 (TC)

TC00108

Appeal number S.C. 3157/2008

Income tax – taxation of earnings – emoluments – whether payment a payment in lieu of notice – whether breach of contract – no – applicable notice period under contract of employment – three months – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

LYNNE CORNELL Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS (Income Tax) Respondents

TRIBUNAL: ROGER BERNER (Judge)

Sitting in public in London on 9 June 2009

The Appellant appeared in person

Peter Death, Appeals Unit, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

This is an appeal by Ms Lynne Cornell ("ms Cornell") against the amendment by HMRC of her self assessment for the tax year 2005-2006.

The question for me to decide is whether a payment of £17,971.26 made to Ms Cornell by Capita Symonds Limited ("CSL") is chargeable to income tax as taxable earnings from an employment of Ms Cornell by CSL, or whether, as Ms Cornell argues, substantially all of that payment is not taxable as earnings, and is exempt from tax as being below £30,000 and thus not taxable as a payment on termination of employment.

Ms Cornell appeared in person and gave evidence. Mr Death appeared for HMRC. There was an agreed bundle of documents. I am grateful to both of them for their helpful submissions.

The Facts

From the evidence before me I find the following facts:

(1) By letter dated 13 October 2009 from CSL, Ms Cornell was offered a permanent appointment as a Professional Development Manager with CSL, and she commenced that employment on 17 January 2005.

(2) Ms Cornell's employment was governed by an employment contract set out in a Statement of Terms and Conditions of Employment which was signed on behalf of CSL on 13 October 2009 and sent to Ms Cornell with the letter of offer. A duplicate copy of that statement was signed by Ms Cornell.

(3) I need not set out the Statement of Terms and Conditions of Employment in full, but the following extracts are material:

"7. PROBATIONARY PERIOD

Your employment will be subject to a 3 month probationary period during [sic] this period both parties are required to give at least one weeks notice of termination. At the end of this period an assessment will be made of your work performance and if satisfactory you will be confirmed in post. If your work performance is not of the required standard the company may extend your probationary period or terminate your employment. This does not prejudice the company's right to dismiss in accordance with the notice provisions during the probationary period, should this prove necessary."

"8. NOTICE PERIOD

Following satisfactory completion of your probationary period your employment will be subject to three months notice, given in writing to you by Capita Symonds Limited.

Should the Company wish to terminate your employment, you will be given the same three months' notice.

The company reserves the right to pay in lieu of contractual notice, where you are not required to work your notice. In these circumstances payment would be for salary only and no other benefits will accrue or be paid in lieu. Payment would be subject to tax and National Insurance deductions."

"20.1.4 After you have given or received notice to terminate your employment we will be under no obligation to give you work and we may in our discretion vary, or suspend you from, the performance of your duties, and/or require you to remain at home. During any such period of garden leave you will remain an employee of the company and therefore bound by your duties of good faith, confidentiality and exclusive service. You will not directly or indirectly contact our customers, suppliers or employees until your employment ends."

(4) Ms Cornell's probationary period was the period of three months from 17 January 2005 to 17 April 2005.

(5) Prior to the end of the probationary period, on 13 April 2005 CSL wrote to Ms Cornell to inform her that, following a business efficiency review as part of which the roles of staff within Central HR had been taken into consideration, her post as Professional Development Manager was at risk of redundancy. This letter included the following statements:

"The period up to 27^th April 2005 will therefore be a consultation period at the end of which it may be necessary to issue notices of redundancy. I must stress however that this letter is not a formal notice of redundancy as any decision will not be made before 27^th April 2005."

"You will not be required to attend work during the consultation period, however, you are still employed by the Company and you may be requested to attend the office or to undertake work at any time throughout this period, upon request by the Company."

(6) On 13 April 2005, Ms Cornell was asked to clear her desk and go home.

(7) In the period from 13 April 2005 to 27 April 2005, Ms Cornell was required by CSL to remain away from the workplace, and she did not have access to her office. She continued to be paid her salary for that period. She did not resign from her employment.

(8) On 27 April 2005 Ms Cornell had a meeting with Jonathan Goring, a director of CSL. During that meeting Ms Cornell was handed a draft Compromise Agreement. The draft agreement stated in its paragraph 2 that "the Employee [Ms Cornell] believes that she may have claims against the Employer [CSL] for holiday pay and for breach of contract", and referred in paragraph 3 to a generic list of possible employment-related claims. Paragraph 5 provided as follows:

"The Employer agrees to pay to the Employee the sum of £17,971.26 ("the Settlement Payment") in full and final settlement of the complaints and proceedings referred to in paragraphs 2 and 3 above, such payment to be made within 14 days of the employed receiving a copy of this Agreement duly signed by the Employer and her Adviser

The Employee's contractual notice period is 3 months and the Employee will receive pay in lieu of notice for this period (such payment to be subject to tax and national insurance) For the avoidance of doubt the Settlement Payment includes the Employee's payment in lieu of notice For the avoidance of doubt the Settlement Payment will be taxed in accordance with Inland Revenue rules"

(9) Because Ms Cornell did not agree that the contractual notice period was three months, and did not wish to prejudice her position regarding her claim that the payment should be exempt from tax, she refused to sign the Compromise Agreement. Notwithstanding that the Compromise Agreement was not signed (and I find as a fact that it was not), the payment of £17,971.26 was made to Ms Cornell, subject to deductions for tax and national insurance contributions.

The Law

Employment income is charged to tax under Part 2, Chapter 2, Income Tax (Earnings and Pensions) Act 2003 ("ITEPA"). In the case of general earnings, s 9(2) ITEPA provides that the amount of employment income which is charged to tax for a particular tax year is the net taxable earnings from an employment in that year. The expression "earnings" is defined by s 62 as meaning:

"(a) any salary, wages or fee,

…

(c) anything else that constitutes an emolument of the employment."

In EMI Group Electronics Limited v Coldicott (HMIT) [1999] STC 803 the Court of Appeal considered the question 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 (see per Chadwick LJ at p 810). It was held that such a payment is an emolument from the employment.

Discussion

The principal question for me in this appeal is: Was the payment by CSL of £17,971.26 to Ms Cornell a payment in lieu of notice in pursuance of a provision to this effect in her contract of employment, which was agreed between her and CSL at the inception of her employment?

Ms Cornell argued that, apart from an amount equal to one week's salary which she accepted was taxable, the payment to her by CSL was not a payment in lieu of notice under her contract. She based this argument on the following propositions:

(1) CSL had been in breach of her employment contract, by sending her home and by failing to consult properly on her redundancy, and that the payment was for those breaches of contract.

(2) That she had not been assessed or confirmed in post at the conclusion of her probationary period on 17 April 2005, and that consequently the three-month notice period that was applicable only on satisfactory completion of the probationary period did not apply. Any payment in lieu of notice would thus be limited to one week's salary; the balance of the payment was in respect of any claim Ms Cornell might have had in respect of the termination of her employment.

Breach of contract

Ms Cornell argued that CSL were under an obligation to provide her with work and were not entitled to suspend her from performance of her duties or require her to remain away from the office. She relied in particular on clause 20.1.4 of the Statement of Terms and Conditions of Employment (which I set out earlier) which expressly provides for "garden leave" but only after the employee has given or received notice to terminate the employment. By implication, Ms Cornell argued, the fact that it was specifically provided that CSL would be under no obligation to provide work after notice of termination meant that such an obligation would be present before any such notice, and that failure to provide work would have been a breach of her employment contract.

Mr Death referred me to Halsbury's Laws of England, Volume 16(1A) (Re-issue), (Employment), para 30, which reads as follows:

30. In general.

The traditional view is that the normal obligation on an employer under a contract of employment is to provide the employee with the agreed remuneration, not necessarily to provide him with work to do. To this general rule there are exceptions where:

(1) the employment is such that the work, and attendant publicity, are as important to the employee as the remuneration, as in the case of an actor or singer;

(2) it is necessary for the employee to be provided with work to do in order to earn the remuneration, as in the case of an employee remunerated by commission or on a piece work basis; or

(3) the employee is engaged to fill a particular office, notably of a professional nature.

It is clear, on the facts of this case, that of the three exceptions set out in Halsbury, neither (1) nor (2) can have any application here. The third exception, however, merits a little further examination.

Halsbury cites in support of the third exception the case in the High Court of Collier v Sunday Referee Publishing Company, Limited [1940] 2 KB 647. The facts of that case are very different from those at issue here. Mr Collier was employed to act as the chief sub-editor of a newspaper owned by the publishing company. That company sold the newspaper, but continued to pay Mr Collier. It was argued that the company's only obligation was to pay Mr Collier his salary. Mr Justice Asquith held that the very foundation of the contract was the appointment of Mr Collier, during the contract, to a specific office and that by selling the newspaper the company had destroyed the office to which it had appointed him. That was a breach of contract. In this case it cannot be said that the requirement on Ms Cornell to go home and remain away from the office, and the fact that work was not provided for her from 13 April 2009 to the termination of her contract on 27 April 2009 destroyed the position to which she had been appointed. This case is far removed from the circumstances of the Collier case, and that case can in my opinion have no application to this appeal. In my judgment, CSL were not obliged under the employment contract with Ms Cornell to provide work for her, whether before or after notice of termination, and accordingly CSL were not in breach of contract in this respect.

Ms Cornell also argued that the CSL consultation procedure was flawed and that this amounted to a breach of contract. Mr Death submitted that the consultation process was not relevant, in that although a failure to consult fairly can result in a dismissal being unfair, this is not itself a breach of contract, as a claim for unfair dismissal can arise even if the dismissal is in accordance with the contract, and thus not a wrongful dismissal. I agree with Mr Death. I find that on the evidence available to me there was no breach of Ms Cornell's contract.

Although it was unsigned, Ms Cornell urged me to consider the draft Compromise Agreement as evidence that CSL itself was concerned that a claim might be made for breach of contract and wrongful dismissal, and that CSL accordingly were paying compensation and not a contractual payment in lieu of notice. I do not consider the draft Compensation Agreement can support this analysis at all. The evident purpose of the Compromise Agreement was to protect CSL from future claims. It was not in any sense an admission of any such claims, and the only evidence it provides of the nature of the payment made to Ms Cornell is in clause 5 where it expressly refers to the Employee receiving pay in lieu of notice for a period of three months. This does not therefore in my view lend any support to Ms Cornell's case, but I have not placed any weight on this unsigned draft in reaching my decision.

Notice period

Ms Cornell argued that on termination of her employment contract on 27 April 2005, the contractual notice period remained at the one week that applied for her probationary period, and had not been increased to three months. She argued that under clause 8 of the Standard Terms and Conditions of Employment her employment could only be subject to three months' notice following satisfactory completion of her probationary period. Otherwise the notice period was one week only, and any taxable payment in lieu of notice would be in an amount of one week's salary; the balance would be tax-free as a payment in connection with the termination of her employment, as it did not exceed £30,000.

Ms Cornell gave evidence, and I have found as a fact, that no assessment was made of her work performance at the end of the probationary period on 17 April 2005, and she was not formally confirmed in post. This is entirely understandable in circumstances where Ms Cornell's position was at that time at risk of redundancy. The question for me is whether the failure of CSL formally to confirm Ms Cornell in post operates, as Ms Cornell agues, to prevent the contract entitling her to three months' notice on its termination on 27 April 2009.

The contractual terms envisage two circumstances. The first is where there has been an assessment of work performance, it is found to be satisfactory and the employee is confirmed in post. The second is where the work performance is not of the required standard, in which event the company may extend the probationary period or terminate the employment. It is evident that in neither case does the employment automatically come to an end at the conclusion of the probationary period; for the contract to be ended there would need to be a termination of the employment. Unless the probationary period was then extended, it would have come to an end, and with it the one week notice period would cease to apply.

I consider that the generally applicable notice period under the employment contract is that provided by clause 8 of the Statement of Terms and Conditions of Employment. This is subject to clause 7, in a case where there is a probationary period, but only while that probationary period, or any extended probationary period, is running. Once that probationary period has expired, unless it is extended, clause 7 no longer has any application. The period of notice prescribed by clause 8 – three months – applies with effect from the date of expiry of the probationary period. In my view, in clause 8 the phrase "satisfactory completion of your probationary period" should be construed to mean completion of the probationary period without it being extended or the employment being terminated at that time. I do not consider, as Ms Cornell argued, that the application of the three-month notice period was dependent on there having been a satisfactory assessment or a confirmation of Ms Cornell in post. On this basis I find that on 27 April 2005 Ms Cornell was entitled to three months' notice under her contract of employment.

In the agreed bundle of documents was a letter from Capita Group plc to HMRC of 10 April 2007 in which it is confirmed that CSL considered that Ms Cornell was entitled to three months' notice period in line with her contract of employment and that she received pay in lieu of notice for this period. The view taken by one party to a contract of a particular provision of it is not determinative of the nature of a payment under that provision. Accordingly, although I have reached the same conclusion for the reasons I have given, I have not taken Capita Group's statements into account in making my decision.

Decision

I have found that, firstly, there was no breach of Ms Cornell's employment contract in the period 13 April 2005 to 27 April 2005, and secondly that Ms Cornell was entitled to three months' notice at the time of the termination of her contract on 27 April 2005. I find that the payment of £17.971.26 was a payment in lieu of notice for that three-month period in pursuance of a provision to that effect in Ms Cornell's contract of employment, which was agreed between her and CSL at the outset of her employment.

Accordingly, I dismiss this appeal.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision.

ROGER BERNER

TRIBUNAL JUDGE

RELEASE DATE: 11 June 2009

Cases also cited to the Tribunal but not referred to in the Decision

Lambe v 186K LTD [2004] EWCA Civ 1045

UK Coal Mining Ltd v National Union of Mineworkers anor (UKEAT/0397/06/RN)