[2010] UKFTT 151 (TC)

TC00457

          

   Appeal number TC/2009/11500

 

Income tax –redundancy payments within s 403 ITEPA?  No on the facts - appeal dismissed

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

                                            ROGER L.M. PRATT                           Appellant

 

 

                                                                      - and -

 

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                       REVENUE AND CUSTOMS (Income tax)    Respondents

 

 

 

 

 

                         TRIBUNAL:             TRIBUNAL JUDGE:  ADRIAN SHIPWRIGHT

                                                            TRIBUNAL MEBER: ROBERTA JOHNSON

                                                                       

                                                                       

 

 

Sitting in public in London on 18 January 2010

 

 

The Appellant appeared in person

 

Karen Powell, Appeals and Reviews Unit, HM Revenue and Customs for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

Introduction

1.      This is an appeal by Mr. Pratt (“the Appellant”) against a closure notice which decided that income tax and National Insurance were due in respect of £30,000 received by the Appellant in the circumstances described below.

The Issue

2.      The essential issue in this case is whether the Appellant was employed by Merrill Lynch (“ML”).  If so could the payment be in respect of  redundancy and so fall within the charge under section 403 Income Tax (Earnings and Pension) Act 2003 when the first £30,000 would not be charged.

3.     Accordingly there are three questions in particular to consider:

(1)    Was The Appellants employed by ML? 

(2)    If so was the payment in fulfilment of the contract with ML or was it a payment for redundancy by ML as the employer?

(3)    Was the Appellant working under a fixed term contract which expired by effluxion of time and he became entitled to receive the payment under the terms of the contract or was he made redundant?

4.     These questions overlap somewhat but provide a useful basis on which to consider this matter.

The Law

The Legislation

5.     The Statute Law, in so far as is relevant, is found in the Income Tax (Earnings and Pension) Act 2003 (“ITEPA”). This imposes a charge on employment income which can include payments made at the end of or after employment.

6.     Chapter 3 of Part 6 of ITEPA is headed “Payments and benefits on termination of employment etc”.

7.     Section 401 IEPA is headed “Application of this Chapter” It provides:

“(1) This Chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with—

(a)            the termination of a person's employment,

(b)            a change in the duties of a person's employment, or

(c)            a change in the earnings from a person's employment,

by the person, or the person's spouse [or civil partner], blood relative, dependant or personal representatives.

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

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

(4)            For the purposes of this Chapter—

(a)            a payment or other benefit which is provided on behalf of, or to the order of, the employee or former employee is treated as received by the employee or former employee, and

(b)            in relation to a payment or other benefit—

(i) any reference to the employee or former employee is to the person mentioned in subsection (1), and

(ii)            any reference to the employer or former employer is to be read accordingly”.

8.     Section 403 IEPA is headed “Charge on payment or other benefit”. It provides:

“(1)          The amount of a payment or benefit to which this Chapter applies counts as employment income of the employee or former employee for the relevant tax year if and to the extent that it exceeds the £30,000 threshold.

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

(3)            For the purposes of this Chapter—

(a)            a cash benefit is treated as received—

(i) when it is paid or a payment is made on account of it, or

(ii)            when the recipient becomes entitled to require payment of or on account of it, and

(b)            a non-cash benefit is treated as received when it is used or enjoyed.

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

(5)            If it is received after the death of the employee or former employee—

(a)            the amount of a payment or benefit to which this Chapter applies counts as the employment income of the personal representatives for the relevant year if or to the extent that it exceeds £30,000 according to the rules in section 404, and

(b)            the tax is accordingly to be assessed and charged on them and is a debt due from and payable out of the estate.

(6)            In this Chapter references to the taxable person are to the person in relation to whom subsection (1) or (5) provides for an amount to count as employment income.

9.     Section 404 IEPA is headed “How the £30,000 threshold applies”. It provides:

(1)            For the purpose of the £30,000 threshold in section 403(4) and (5), the payments and other benefits provided in respect of an employee or former employee which are to be aggregated are those provided—

(a)            in respect of the same employment,

(b)            in respect of different employments with the same employer, and

(c)            in respect of employments with employers who are associated.

(2)            For this purpose employers are “associated” if on a termination or change date—

(a)            one of them is under the control of the other, or

(b)            one of them is under the control of a third person who on that termination or change date or another such date controls or is under the control of the other.

(3)            In subsection (2)—

(a)            references to an employer, or to a person controlling or controlled by an employer, include the successors of the employer or person, and

(b)            “termination or change date” means a date on which a termination or change occurs in connection with which a payment or other benefit to which this Chapter applies is received in respect of the employee or former employee.

(4)            If payments and other benefits are received in different tax years, the £30,000 is set against the amount of payments and other benefits received in earlier years before those received in later years.

(5)            If more than one payment or other benefit is received in a tax year in which the threshold is exceeded—

(a)            the £30,000 (or the balance of it) is set against the amounts of cash benefits as they are received, and

(b)            any balance at the end of the year is set against the aggregate amount of non-cash benefits received in the year”.

10.  Accordingly, if the payment is not otherwise chargeable to income tax the first £30,000 is not liable to income tax under these provisions.

The Authorities

11.  We were not referred to any helpful authorities.

The Evidence

12.  We were provided with a volume of documentation.  This was an agreed bundle of documents. The documents were all admitted in evidence no objection having been taken to any of the documents.

13.  No witnesses were called by the Appellant.

Findings of Fact

14.  From the evidence we make the following findings of facts

(1)    Mr Pratt entered into an agreement (“the Temporary Worker Contract”) on the 3 May 2005 with Hays Specialist Recruitment Services Limited (“HSRS”).

(2)    HSRS is defined as the “Employment Business” and Rodger Pratt as the “Temporary Worker” in the document.  Clause 1 sets out the other definitions.  It defines “Client” as “the company, organisational person notified as such to the Temporary Worker in the relevant Assignment Confirmation Letter”.  “Assignment Confirmation Letter” means “... the letter, e mail or fax from the Employment Business” (i.e. Hays).  It also provides that “HPPS” means “Hays Personal Payroll Services Limited ....” or another company to provide payroll services.

(3)    Clause 2.3 of the Temporary Worker Contract provided:

“Throughout the period of this Agreement, the Temporary Worker will be self-employed, and working under a contract of services with the Employment Business.  For the avoidance of doubt, this Agreement does not give rise to a contract of employment between the Employment Business and the Temporary Worker”.

(4)    Clause 4.1 provided:

“The Temporary Worker shall be paid by [the Hays company, HPPS] weekly in arrears at [a specified rate] per day (whether or not the Employment Business or HPPS receives payment from the Client in respect of such work) and all applicable taxes (including any national insurance contributions) shall be deducted as required by law including specific legislation governing the tax treatment of workers assigned by employment businesses  The Employment Business [HSRS] shall pay the Temporary Worker in the event that HPPS fails to do so for any reason”.

(5)    Clause 13 of the Temporary Worker Contract is an “entire contract clause”.  It provided:

“This Agreement, together with the details provided in the relevant Assignment Confirmation Letter, constitutes the entire and only legally binding agreement between the parties relating to each Assignment, and replaces any previous agreements or arrangements”.

(6)     An agreement with Merrill Lynch Lateral Recruitment was made on 3 May 2005.  This sets out various terms including the period of assignment from 3 May 2005 to 4 November 2005.

(7)    It also provided for a bonus of £15,000 subject to certain conditions which accrued evenly over the period.  It also provided that the document “should not be construed as conferring to the Temporary Worker any aspect of employment status with the bank”.

(8)     HSRS treated all remuneration received as earnings from employment with HSRS and taxed it as such.

(9)    From the e-mail correspondence that was provided to us it is clear that ML did not consider the Appellant to be an employee of ML.  The most important part of this correspondence (Documents C 43) reads “Roger Pratt is self-employed, and working under a contract for services with the Employment Business (in this case Hays)…”

(10) Mr Pratt sought to bring a case against Merrill Lynch at the Employment Tribunal.  M L queried the Employment Tribunal’s jurisdiction to hear that case on the grounds that Mr Pratt was not an employee of M L.  ML also entered a caveat in case the Employment Tribunal decided that there was jurisdiction.  Mr Pratt withdrew his Employment Tribunal claim.

15.  In summary the Appellant:

(1)  Had a contract with Hays which contains an entire contract clause;

(2)  That contract provided that there was no contract of employment with the Employment Business i.e. ML

(3)  ML say that the Appellant was not an employee of ML

(4)  Hays operated PAYE etc. as if the employment or deemed employment was with Hays.

The Submissions of the Parties

The Appellant’s Submissions in outline

16.  In essence, the Appellant submitted that he was an employee of Merrill Lynch who was made redundant and paid £30,000 on redundancy which accordingly was not taxable.  He contended he was not an employee of HSRS.

17.   The Appellant contended that all the evidence showed that he was an employee of airmail who was made redundant.  He did not accept that it was a bonus payment that he received. 

HMRC’s Submissions in outline

17.  In essence, HMRC submitted the receipts were income from the arrangements with HSRS and liable to income tax and National Insurance on the full amount.

18.  In particular HMRC argued

(a)        the Appellant was not an employee of ML:

(b)        The Appellant was not dismissed or made redundant by ML.  He could not be as he was not an employee of ML;

(c)        The Appellant was paid in accordance with the bonus arrangements entered into and was not paid for redundancy or termination of employment;

(d)        The payment was therefore fully taxable;

(e)        Accordingly the appeal should be dismissed.

Discussion

Introduction

19.  At the beginning of this Decision we had identified 3 questions we consider to be of particular importance in deciding this case.  These were

(1)  Was The Appellants employed by ML? 

(2)  If so was the payment in fulfilment of the contract with ML or was it a payment for redundancy by ML as the employer?

(3)  Was the Appellant working under a fixed term contract which expired by effluxion of time and he became entitled to receive the payment under the terms of the contract or was he made redundant?

Was the Appellant employed by ML?

20.  We have found that the Appellant had a contract with Hays.  The documentary evidence does not show an employment relationship with ML.  ML did not consider the Appellant to be an employee of ML and the Employment Tribunal claim against ML by the Appellant was withdrawn after the jurisdiction point had been raised.

21.  We find that the Appellant was not an employee of ML.  To the extent possible we find this as a primary fact.

22.  We have taken into account in reaching this conclusion that the Appellant stated he did this because he felt he had no choice.  He said he did so as he wished to be paid.

23.   We consider that he did have the choice but he decided to enter into a further agreement but equally he could have walked away.  He chose to enter into the arrangements needed for future employment and they are binding on him. There was no evidence of duress, coercion or undue influence.  The Appellant has not shown that the documents do not record the arrangements actually entered into between the parties.  We have already found that the documents record these arrangements.

24.  We have also taken into account

(1)  The Appellant’s “Employee ID”;

(2)  An email inviting him to New Hire Orientation & Diversity Training dated 10 November, 2005;

(3)  E-mails arranging meetings on a five and 12 April, 2005; and

(4)  Guidelines for Business Conduct.

We consider that these are neutral and do not show that the Appellant was an employee of ML. 

Redundancy from ML etc.

25.  Given that the Appellant was not an employee of ML it is hard to see how he could be made a redundant employee by them.

26.  We find as a primary fact that the Appellant was not made a redundant employee by ML.

27.  Further we consider that the Appellant worked under a fixed term contract.  This came to an end by effluxion of time.  These arrangements provided for a “bonus” in certain circumstances of £30,000.

28.  Accordingly, the payment of £30,000 was essentially in fulfilment of the contractual arrangements between the parties.  We find this as a primary fact to the extent possible namely that the payment was made under the terms the contract.

29.  We record that we will find this to be the case even if we are wrong and ML was the employer.  It was not a redundancy payment and we so find. 

Fixed term contract or redundancy?

30.  We have already found that there was no redundancy and that there was a fixed term contract.

Conclusion

31.  We have found that the Appellant

(1)  was not an employee of ML

(2)  was not made redundant by ML

(3)  received what was due under the bonus arrangements and not as a termination payment.

32.  Accordingly, we find that the payment was “otherwise taxable” and so could not fall within the £30,000 exemption.

33.  Accordingly, the appeal is dismissed.

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

 

 

 

 

 

                                              ADRIAN SHIPWRIGHT

   TRIBUNAL JUDGE

RELEASE DATE: 8 April 2010