First-tier Tribunal (Tax)

 

[2010] UKFTT 180

TC00484

 

Appeal number: TC/09/11141

 

Income Tax:  Post Office Network Reinvention Programme Closure Scheme – payment upon resignation as subpostmaster – s401 Income Tax (Earning and Pensions) Act 2003 – no deduction other than under s403 – Appeal refused.

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

                                                 BASIL BIMSON                                Appellant

 

 

                                                                      - and -

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                    REVENUE AND CUSTOMS (INCOME TAX) Respondents

 

TRIBUNAL JUDGE:            John M Barton, WS

(Member)                               Ian Malcolm, BSc, BA, JP

 

 

 

Sitting in public at 126 George Street, Edinburgh on Monday 29 March 2010

 

 

M Hancock, for the Appellant

 

William Kelly, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

 

 

© CROWN COPYRIGHT 2010

 

DECISION

 

1.       This is an appeal by Basil Bimson against an amendment to his self assessment for the year to 5 April 2006 whereby a compensation payment of £77,905.99 received by Mr Bimson, less a deduction of £30,000, is liable to Income Tax as employment income

2.       The appeal was heard at 126 George Street, Edinburgh on 29 March 2010.  Mr Bimson was represented by Mr M.Hancock of Hancocks Accountants Ltd (“Hancocks”).  HMRC was represented by Mr William Kelly, HM Inspector of Taxes.  The material facts were not in dispute and no evidence was led.

3.       The following productions were before the Tribunal –

(1)        For Mr Bimson

(a)        Extracts from Post Office web-site.

(b)        Definitions of “license” and “franchise”

(c)        Receipt for Introduction fee dated 4 April 2000.

(d)        Conditions for Mr Bimson’s appointment for Lowton St Mary’s Sub Post Office.

(e)        P60 issued to Mr Bimson for year to 5 April 2002.

(f)         Taxation Guide for subpostmasters

(g)        Letter dated 3 June 2004 from Post Office Ltd to Mr Bimson explaining alternative metod of calculating compensation.

(h)        Correspondence between Hancocks and HMRC over the relevant period.

 

(2)        For HMRC

(a)        Mr Bimson’s Tax Return for year to 5 April 2006

(b)        HMRC Amendment

(c)        Appeal for Mr Bimson

(d)        Final Offer document from Post Office

(e)        Document confirming purchase of business

(f)         DTI statement

(g)        Confirmation that business value method used

(h)        Copy of Mr Bimson's appointment as a subpostmaster

(j)     High Court Order in Basharat case & Skeleton Argument

(k)        Company accounts

(l)         Copy of letter from Post Office to Mr Bimson dated 28 October 1999

(m)       Copy of Appendix A-C document supplied by Mr Bimson

(n)        Licence fee computation

(o)        Method of computation from Post Office to Mr Bimson, date unknown

(p)        Example of fixed sum calculation

(q)        Letter from Post Office to Mr Bimson dated 31 May 2005

(r)         Letter from Post Office to Mr Bimson dated 3 June 2004

(s)         National Federation of Sub-Postmasters - web page

(t)          HMRC Internal Guidance

(u)        Post Office Contract

(v)        Correspondence between Hancocks and HMRC over the relevant period.

 

Material Facts

4.       The material facts are as follows –

5.       Mr Bimson ran a retail stationers business and Post Office from premises at Lowton St Mary's Post Office, Warrington.  He traded as a limited company, B & S Bimson Ltd (“the Company”) which was incorporated on 14 January 2000.  Mr Bimson had been appointed as subpostmaster on 4 April 2000.  At that time, Mr Bimson paid to the Post Office the sum of £21,879 net of VAT representing an introductory licence fee; and he also incurred costs of £25,121 in converting his premises to accommodate the Post Office facility.

6.       Mr Bimson’s remuneration from the Post Office was paid to the Company and included within the accounts for the Company.  However, he was personally liable for Class 1 National Insurance Contributions in respect of the remuneration from the Post Office.

7.       The Post Office Network Reinvention Closure Programme Scheme was Government funded.  It was part of a highly publicised Network Reinvention Policy whereby Post Office Ltd aimed to close around one third of the urban Post Offices in the United Kingdom.

8.       On 20 August 2004, Mr Bimson received an offer of compensation from Post Office Ltd to close his Post Office branch.  For subpostmasters who had commenced after 31st March 1999, Post Office Ltd offered two methods of compensation, namely a fixed sum method in accordance with a sliding scale; and the alternative, a business value method.  Mr Bimson chose the latter method of calculation.

9.       Guidance was issued with the approval of the Department of Trade and Industry, to the effect that a compensation payment would represent in its entirety compensation for loss of office.  That guidance was applicable to all payments made under the Closure Scheme.

10.    The letter from Post Office Ltd to Mr Bimson dated 20 August 2004 included the following paragraphs:-

2.1 Subject to each of the circumstances listed in paragraph 1 above being satisfied, Post Office Ltd offers to pay to you on or about your last day of service £76,817.70, if a final decision is taken to close your branch.  This sum represents compensation for loss of office, and all Post Office business must cease upon your last day of service….

2.3.1 …..you hereby (by means of your counter-signature at (A) below) give notice to Post Office Ltd of your resignation…… under your Contact,....

11.    On 29 August 2005, the Post Office paid Mr Bimson £77,905.99 in compensation.

12.    The cost to Mr Bimson on reconverting his premises was about £38,000.

13.    No details of any compensation payments were shown on Mr Bimson’s 2005-2006 Return, and on 9 July 2007 an Aspect Enquiry was opened by HMRC under the provisions of s9A Taxes Management Act 1970. 

14.    On 17 September 2007, HMRC expressed their view that the payment in excess of £30,000 fell to be treated as "employment income" for the relevant tax year, and to be taxed as such.

15.    On 27 December 2007, HMRC issued a closure notice bringing out tax due of £14,883.42.

16.    On 23 January 2008, Hancocks lodged an appeal against this decision.

Statutes

17.    Section 5 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) provides

Application to offices and office-holders

(1)        The provisions of the employment income Parts that are expressed to apply to employments apply equally to offices, unless otherwise indicated.

(2)        In those provisions as they apply to an office­

(a)        references to being employed are to being the holder of the office;

(b)        "employee" means the office-holder;

(c)        "employer" means the person under whom the office-holder holds office.

 

 

(3)        In the employment income Parts "office" includes in particular any position which has an existence independent of the person who holds it and may be filled by successive holders.

18.    Section 62 of ITEPA defines “earnings” in relation to an employment as

(a)        any salary wages or fees;

(b)        any gratuity or other profit or incidental benefit of kind obtained by the employees if it is money's worth; or

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

19.    Chapter 3 of ITEPA is headed PAYMENTS AND BENEFITS ON TERMINATION OF EMPLOYMENT ETC, and within that Chapter, s 401 is as follows:-

Application of this Chapter

(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.

Prior authorities

20.    Reference was made to the following authorities:-

(1)        For Mr Bimson

Wolstenholme v Post Office Ltd [2003] ICR 546, [2003] IRLR 199

Chohan v Logan: Employment Appeal Tribunal, 29 August 2002 (EAT/284/02) unreported

Express & Echo Publications v Tanton [1999] IRC 693

McManus v Griffiths 70 TC 218

Hall v Lorimer [1994] 1 All ER 250

Carmichael v National Power plc [1999] 4 All ER 897

Lane v Shire Roofing [1995] IRLR 493

O’Kelly v Trusthouse Forte plc [1984] QB 90

Barnett v Brabyn 69 T.C. 133 

 

 

 

(2)        For HMRC

Dhendsa v Richardson SpC 134

Glenboig Union Fireclay Co Ltd v CIR 12 TC 427

 

The Tribunal also directed the parties to the following:

 

Kelsall Parsons & Co v CIR 21 TC 608

Blackburn v Close Bros Ltd 39 TC 164

CIR v Brander & Cruickshank 46 TC 574

Submissions

21.    In his submission to the Tribunal, Mr Hancock pointed out that Mr Bimson had incurred costs of £21,121 in converting his premises and a further £38,000 in reconverting the same, together with a licence fee of £21,879, a total of £85,000 whereas he only received £77,905 in compensation, representing a “loss” of £7,095.

22.    On the basis of the Agreement with Post Office Ltd and other published information, Mr Bimson was self employed; and Mr Hancock illustrated this from the cases of Wolstenholme v Post Office Ltd and Chohan v Logan in that Mr Bimson was not obliged personally to perform the required work, and was entitled to employ a substitute.  He was a provider of services, and was not an employee of the Post Office.

23.    Mr Hancock also referred to s 20(2) of the Postal Services Act 2000

(2) No officer, servant, employee, agent or sub-contractor of a universal service provider shall be subject, except at the suit or instance of the provider, to any civil liability ……

to demonstrate that an “agent” can work for the Post Office.

 

24.    It was further pointed out that throughout the period that Mr Bimson was a subpostmaster, his remuneration from the Post Office and the profits from his business were all assessed as if it was Schedule D income; and indeed, in his personal tax return, he recorded that he had no taxable income.  Mr Hancock acknowledged that Mr Bimson had been charged to National Insurance as an employee, but he submitted that different criteria applied for National Insurance.

25.    Mr Hancock added that in the final accounts for the Company, the amount of the compensation was set against the capital costs.

26.    Mr Kelly explained that this was an appeal by Mr Bimson against a decision of HMRC to amend Mr Bimson’s self-assessment tax return.  The HMRC decision was that the payment made to Mr Bimson by the Post Office was a payment to which chapter 3 of Part 6 of ITEPA applied, because it fell within the definition contained in section 401 of that Act.  The payment was made as a result of Mr Bimson’s agreement to take advantage of the Post Office Network Reinvention Programme Closure Scheme.  The effect of HMRC's decision was that the amount of the payment in excess of £30,000 fell to be treated as "employment income" for the relevant tax year, and to be taxed as such.

27.    Mr Kelly explained that for ITEPA to apply to the payment:-

(a)        There must be an “office” or “employment”;

(b)        the income must fall within s 62 as “earnings”; and

(c)        the income comes from that office or employment.

Mr Kelly acknowledged that Mr Bimson was not an employee of the Post Office.  However, having regard to the absolute discretion which the Post Office had in appointing a subpostmaster, Mr Kelly concluded that the position of subpostmaster was an “office” and that Mr Bimson was therefore an officeholder for the purposes of ITEPA.  Further, the remuneration received by Mr Bimson from the Post Office came within the wide meaning of “earnings” as set out in s 5 of ITEPA.

 

28.    Mr Bimson’s remuneration from the Post Office was paid to the Company and assessed to Corporation Tax, but Mr Kelly emphasised that this was a concession and that where a subpostmaster did not have a private trade, the income from the Post Office was assessed under ITEPA.

29.    In the opinion of Mr Kelly, the payment by the Post Office was compensation for loss of office, namely the ending of the Post Office contract, and was therefore a payment to which s 401 of ITEPA applied.

30.    In a letter from Hancocks to HMRC dated 29 August 2007, it was stated that

……….our client, after further investigation, was able to compute monies owing to himself from the GPO on the alternative business method which takes into account the extensive costs of converting the premises back from the original restructuring to conform to GPO Post Office requirements.

In response to this, Mr Kelly founded on the observation of Lord Buckmaster in Glenboig Union Fireclay Co Ltd v CIR at 464 to the effect that

 

……..there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test.

Mr Kelly concluded that the whole of the payment by the Post Office fell to be assessed under s 401 (subject only to the deduction of £30,000 under the provisions of s 403).

 

 

 

 

Reasons

31.    The question before the Tribunal was whether the sum of £77,905.99 received by Mr Bimson from the Post Office was correctly assessed under s 401 ITEPA, subject only to the statutory deduction of £30,000 under the provisions of s 403 of that Act.

32.    Section 401 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.

The first question to be asked is whether there was “employment” in relation to Mr Bimson.  Significantly s 5 of ITEPA declares in general, that the relevant provisions applying to employment, apply equally to “offices”.

 

33.    It was generally agreed that Mr Bimson was not an “employee” of the Post Office; but was he the holder of an “office” which would bring him into the description of “employment” as that expression is used in s 401?  The duties of a subpostmaster were set out fully in a letter from the Post Office to Mr Bimson dated 28 October 1999 and the contract which he signed on 9 February 2000, and in the opinion of the Tribunal, Mr Bimson was required to provide services in a manner consistent with the holder of an “office”.

34.    In common with many subpostmasters, Mr Bimson carried on a business as a limited company from the same premises as the Post Office.  Mr Bimson’s income from the Post Office was paid to the Company.  In the annual accounts of the Company, Mr Bimson’s remuneration from the Post Office was aggregated with his trading income and the Company was assessed to Corporation Tax in the same manner as an individual might be assessed under Schedule D. 

35.    The case as presented by Mr Hancock was that s 401 of ITEPA was directed to taxpayers who are assessed under Schedule E, but as Mr Bimson’s whole business (including his remuneration from the Post Office) was in effect assessed under Schedule D, the payment of £77,905.99 should similarly be treated as a receipt of his business.  In the course of his reply, Mr Kelly had directed the Tribunal to an HMRC manual –

The remuneration of a sub-postmaster is in law chargeable as employment income.  Where, however, a retail trade or business within the scope of Case I of Schedule D is carried on from the same premises as the sub-post office, the remuneration as sub-postmaster may in practice be included with the trade receipts and accordingly assessed under Schedule D.

36.    In the case of CIR v Brander & Cruickshank, that practice had been followed in relation to a firm of solicitors who held the office of company registrar.  A payment had been made upon the termination of the office and the question arose whether the payment fell to be assessed under Schedule D or Schedule E.  Lord Guest observed at p593C -

My view is that, once it is decided that the registrarship is an "office" and the fees assessable under Schedule E, there is no room for any inclusion of those fees under Schedule D.

Having regard to the foregoing, this Tribunal is satisfied that s 401 of ITEPA applies to the terminal payment received by Mr Bimson.

 

37.    There was also the question whether any element of the compensation payment should be excluded from the amount to be assessed under s 401 of ITEPA.  Upon becoming subpostmaster, Mr Bimson had been obliged to pay the sum of £21,879 net of VAT representing an introductory licence fee; and he also incurred costs of £25,121 in converting the premises to accommodate the Post Office premises, and a further £38,000 in restoring the premises.  Under the Post Office Network Reinvention Closure Programme Scheme, subpostmasters, who had commenced after 31 March 1999, were offered two methods of compensation, namely a fixed sum method in accordance with a sliding scale; and the alternative, a business value method.  Mr Bimson chose the latter method of calculation, as it took into account his capital expenditure.

38.    However, in the letter from the Post Office to Mr Bimson dated 20 August 2004 setting out the terms and conditions of the offer of compensation (then stated to be £76,817.70), it was clearly recorded that the sum offered was to “represent compensation for loss of office”.  There was no breakdown of this figure, nor was there a suggestion that any part related to the expenditure which had been incurred by Mr Bimson.  Mr Kelly referred to the decision in Glenboig Union Fireclay co Ltd v CIR wherein Lord Buckmaster observed at p 464 -

But there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test.

Following Lord Buckmaster, the whole payment to Mr Bimson has to be regarded as “compensation” and is therefore subject to tax under s 401 of ITEPA.

 

39.    For the avoidance of doubt, there is no provision in ITEPA which would permit any deduction against the amount to be assessed, other than the figure of £30,000 referred to in s 403.

40.    For these reasons, the Tribunal finds that the compensation was properly assessed against Mr Bimson under the provisions of s 401 of ITEPA, and the appeal is accordingly refused.

This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

 

 

 

 

 

 

JOHN M BARTON, WS

TRIBUNAL JUDGE

 

RELEASE DATE:  21 APRIL 2010