First-tier Tribunal (Tax)

[2010] UKFTT 346 (TC)

TC00628

Appeal number TC/2009/16009

DIRECT TAX- whether payment of £76,872 paid by company in lieu of notice was a contractual payment- if so, the £30,000 tax free threshold did not apply - payment contractual- appeal dismissed

FIRST-TIER TRIBUNAL

TAX

PAUL GOLDBERG Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Direct Tax) Respondents

TRIBUNAL: David Steele Porter (Judge)

John Nisbet (Member)

Sitting in public in Leeds on 23 June 2010

The Appellant in person

Mrs Najine Newham instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.     The Appellant, Paul Goldberg (Mr Goldberg), appeals against an amendment  raised under sections 28 (A) and (B) Taxes Management Act 1970 for the tax year  ended 5 April 2005, amending Mr Goldberg’s Self-Assessment from £18,825.90 tax due for repayment to £6,826.00 due for repayment. Mt Goldberg says that the payment was not made under his contract of employment but under a breach of contract by Intouch Group PLC (his employers) for failing to give him an appropriate notice of termination. The Respondents (HMRC) say that there was a contract of employment and the payment was made to him in lieu of notice under the terms of his contract.

2.     Mrs Najine Newham (Mrs Newham) appeared for HMRC and produced a bundle of documents to the Tribunal. Mr Goldberg appeared in person. We were referred to the following cases:_

·       EMI Group Electronics Limited V Coldicott( H M Inspector of Taxes) [1997] STC 1372

·       SCA Packaging Ltd v Revenue and Customs Commissioners [2007] EWHC 270

The facts

3.     Mr Goldberg told us that he and his colleague, Andrew Garnham (Mr Garnham), had been in negotiation with Intouch Group PLC (Intouch) for some 18 months in relation to the development of a software business referred to as GAP. They had been seeking an investment of £750,000 from Intouch, but the chairman, Mr Watkins, had decided not to proceed with the venture. The market for computer products and activities had expanded rapidly during the negotiations, but unfortunately the market had collapsed before the proposals could be finalised. As a result, Intouch purchased a software company and as a result had asked Mr Goldberg and Mr Garnham to join the company to expand that business. Mr Goldberg told us that he had met with Mr Watkins at his local public house ‘The Black Bull’ where the terms of the agreement were discussed. At that meeting, he had not agreed to join the company because he wanted a provision for either a BMW or a superiot motor car, and a 12 months rolling contract with a 12 months notice period if he were to be dismissed. Mr Goldberg produced copies of the emails between himself and Mr Garnham dated 2 February 2002 in which Mr Garnham had stated:-

“…I understand your concern over the twelve month contract and the car but Bob (Mr Watkins) has a point in that no other current employee has such termination rights/ car policy so this would lead to a dangerous precedent if such terms were to be offered to any new people particularly when the base salary on offer is already in excess of existing senior staff…”

Mr Goldberg alleged that he therefore entered into a contract with Intouch, which did not include a provision for 12 months notice if they wished to terminate the agreement. He produced a letter addressed to Mr Garnham, from Mr Garnham’s solicitors, Mc Cormicks, dated 10 August 2004, relating to Mr Garnham’s contract in which the solicitors advised:

“ Contractual position. The contract of employment states the following:

“On commencement of your employment, you will be entitled to 12 months notice apart from in the case of gross misconduct and you will be required to give one month’s notice to the company “.

 There is no payment in lieu of notice clause in your contract of employment. I have seen a copy of an email from Graeme King dated 19 July 2004 to Paul and yourself. It states “we will now be proceeding on the basis that you will not continue to be employees of InTouch Group and we expect this will take effect as of 1 August 2004”. I would interpret this as being confirmation of termination of employment with the company. No notice has been given therefore the company has terminated your employment in breach of contract. Any compensation payment to be made will therefore be genuine compensation for loss of office and will attract tax exemption in respect of the first £30,000 of any such payment.”

Mr Goldbergh did not produce Mr Garnham’s entire contract so that we have no means of knowing whether the contents were the same as that contained in the letter of 1 February 2001 or, indeed, in the informal contract he alleges related to him.

Mr Goldberg alleged that there was no formal contract between him and InTouch, but the letter from the solicitors to Mr Garnham refers to such a contract. Mr Goldberg was unable to explain why that should be. Mrs Newham produced a contract ,which purported to be the type of contract entered into by the company with staff at Mr Goldberg’s level. However, Mrs Newham could not say when the contract was introduced and we are therefore unable to take any note of it. Mrs Newham did, however, refer us to a letter ostensibly dated 1 February 2001, although she said the date was incorrect and should be 2002. That letter, addressed to Mr Goldberg appears to set out the terms of his employment with InTouch and contained the same wording as the contractual position referred to in the letter above to Mr Garnham. Mr Goldberg referred to a computer entry, which appears to be where the letter was stored in InTouch’s computer system. He suggested that as the entry referred to “date modified” it was by no means certain that the letter was dated 1 February 2001. Mrs Newham referred us to a letter dated 4 February 2002 from Mr Goldberg, addressed to Mr Watkins, in which he accepted the offer of employment apparently set out in the letter of 1 February 2001. The letter of 1 February 2001 indicated that his employment would start on 1 March 2002. Furthermore, in Mr Goldberg’s letter of 11 March 2008, addressed to Mr Arnell ( the inspector in charge of the case) he says:-

“At the meeting between myself, Bob Watkins and Andrew Garnham in January 2002 it was explained that my potential salary was in excess of the current senior staff/directors…”

This ties in with the email date 2 February 2002 referred to above. On the basis of the evidence before us we accept that the letter of 1 February 2001 was in fact dated 1 February 2002 and represents the contract of employment between Mr Goldberg and InTouch.

4.     Mr Goldberg explained that Mr Watkins had decided to sell InTouch to the Matthews Group, a company based in the United States of America. That company had a similar software company to the one which he and Mr Garnham had been developing. It was clear that the Matthews Group would not proceed with the take over if they knew of Mr Goldberg’s and Mr Garnham’s involvement with GAP. As a result Mr Goldberg had agreed that InTouch could “dress up” his departure on the basis that he had been made redundant. In an email dated 19 July 2004 Graeme King  wrote:-

“Andrew/Paul

I have yet to receive any formal response to my latest correspondence 06.07.04. We will now be proceeding on that basis that you will not continue to be employees of the InTouch Group and we expect that this will take effect as of the 1^st August 2004…In the meantime might I remind you that you are still employees of the InTouch Group and must remember that any sensitive company information you may have gathered over recent weeks is to be kept strictly confidential”.

 A subsequent letter dated 6 August 2004 addressed to Mr Goldberg written, we were told, by Mr Goldberg to keep up the pretence, sets out the proposals with regard to the various payments as follows:-

“.. In confirmation of this discussion we regret to advise you that your position with the InTouch Group has become redundant due to the restructuring of the company. The effective date of your redundancy will be 31 August 2004. You are entitled to 12 months notice, effective from this date. You will not be expected to serve any of your notice period on behalf of the company and you will receive payment in lie of notice.

You will receive redundancy pay in line with statutory regulations….

A summary of payments that will be due to you

·       Two weeks redundancy payment £ 540.00

·       12 Months pay in lieu of notice £76.872.00

·       12 Months car allowance £  7,800.00

·       9.5 days Holiday pay (accrued but not taken) £ 2,800.00 ”

Mrs Newham produced details of his wage slips confirming these payments. Mr Goldberg accepted that he had received the payments on this basis to keep up the pretence. Judge Porter asked if he had thought to negotiate some payment for agreeing to the payments on this basis, in recognition that he would not be entitled to receive the first £30,000 of the payments tax free. Mr Goldberg stated that he had not thought to do so.

The Law

5.     The Income Tax (Earnings and Pensions) Act 2003 defines:

Section 7 Earnings  .. any amount treated as earning

Section 62.(2) Earnings .

(a)   any salary , wages or fee.

(b)  any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or

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

Section 309 (1) No liability to income tax in respect of earnings arises by  virtue of a redundancy …..

Section 401 (1) This Chapter applies to payments and other benefits which are received directly or indirectly in consideration of or in consequence of , or otherwise in connection with :-

(a)              the termination of a person’s employment…..

Section 403 (1) The amount or the payment of a 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 freehold.

Finance Act 2007 section 95.

 Incorrect return or accounts for income tax or capital gains tax purposes

95 (1) Where a person fraudulently or negligently

(a) delivers any incorrect return of a kind mentioned in section 8  or 8A of this Act

(b)…

(c) ….

he shall be liable to a penalty not exceeding the amount of the difference specified in subsection (2). (Effectively the difference between the tax declared and the tax eventual assessed)

The section takes effect from 1 April 2009

The Cases

EMI Group Electronics Limited V Coldicott( H M Inspector of Taxes) [1997] STC 1372. If a contractual payment in lieu of notice is subject to the employer’s discretion, the payment will constitute earnings, because it is paid in lieu of salary that the employee should otherwise have received, and there is no breach of contract.

SCA Packaging Ltd v Revenue and Customs Commissioners [2007] EWHC 270 Where a payment in lieu of notice is made, in circumstances contemplated in the employment contract, the payment must always be taxable. The employer and trade  union had agreed a memorandum of understanding, which incorporated (inter alia)  payments in lieu of notice into all the employees contracts.

Summing up

6. Mrs Newham submitted Mr Goldberg was employed under the terms of the contract contained in the letter dated 1 February 2001 (which she submitted the evidence showed to have been sent in 2002) which provided for 12 month’s notice of termination. In the letter of 6 August 2004 from Sandie Wilson (HR Manager) Intouch made it clear that the payment of £76,872 represented 12 months pay in lieu of notice. Mr Newham took us through the two cases and commented as follows:

EMI Group Electronics Limited V Coldicott( H M Inspector of Taxes) a Neurberger J  referred to Henry v Foster (1932) 16 TC 605 :

“In my judgment, the determining factor in the present case is that that the payment whatever the parties chose to call it was a payment that the company had contracted to make to [the employee] as part of his remuneration for his services as a director…”

Neurberger J concluded:

“I am satisfied, therefore, that there is nothing in the authorities which requires this court to reach the conclusion that 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 not properly to be regarded as an emolument from that employment. In my view, for the reasons which I have set out, such a payment is an emolument from the employment …”

In SCA Packaging Ltd v Revenue and Customs Commissioners Lightman J  concluded that the employees were entitled to specified payments in lieu  under their terms of contract imported by the memorandum  of understanding and that the payments were therefore taxable.

In the circumstances, the payment was made as a result of the contract between Intouch and Mr Goldberg and is taxable as earnings. She accepted that it was for HMRC to prove negligence on Mr Goldberg’s part for the penalty to become due. The penalty had been levied at 25% and amounted to £3000. She submitted that Mr Goldberg had completed his tax return on the basis that he was entitled to tax relief on £30,000 when he knew that the payment of £76,782 had been paid to him as a payment in lieu of notice and that he had been negligent in the completion of his return.

6.     Mr Goldberg submitted that the contract purportedly sent on 1 February 2001 was not an agreement he had entered into as he had been in discussion with Mr Watkins for some 18 months trying to obtain funding for the software business. It was only thereafter, in 2002, that negotiations took place for his employment. His response, accepting the terms of his employment, on the 4 February 2002 was a year later and was based on the terms set out in the emails between himself and Andrew Garnham. The letter of 6 August 2004 was drafted to assist Mr Watkins with the sale of Intouch and to prevent the Purchasers being aware of Mr Goldberg and Mr Garnham’s involvement with the GAP software company. The advice from their solicitors McCormick’s indicated that the termination of Andrew Garnham’s contract was in breach of contract and any compensation would be tax exempt. He and Mr Garnham had the same contracts and the advice sort from McCormicks was for both of them. He also submitted that he had been transparent in his tax return advising as to the circumstances of the claim and he had sort legal advice which indicated that the payment should be tax exempt. In the circumstances he did not accept that he was negligent.

The decision

7.     We have considered the facts and the law and have decided that the payment was a payment in lieu of notice and we dismiss the appeal. We have, however, found the facts in the case to be confusing. Mr Goldberg is adamant that the letter of 1 February 2001, which was dated 2001 and not 2002, did not represent the agreement he had entered into with Intouch for his employment. The agreement he entered into as a result of the exchange of emails had no provision for him to paid 12 months salary in lieu of notice. He provided no further evidence as to the contents of that agreement. He alleged, at the Tribunal, that he reached an accommodation with Mr Watkins that he would accept the payment as ‘a payment in lieu of notice’, even though it was not, to assist with the ‘due diligence’ enquiries that might arise on the take over by the Matthews Group. He has produced no independent evidence of that. We consider Mr Goldberg to be a sophisticated employee. We would have thought that he would have asked Mr Watkins to make some further payment in view of the fact that he might not be entitled to the tax exemption he was expecting. We do not believe that Mr Goldberg was in a position to influence any negotiations with the Matthews Group. On the evidence provided, we think it is unlikely that the letter from Sandie Wilson, setting out the terms of the payments, was a fabrication. In spite of the fact that Mr Goldberg did not accept the letter of 1 February 2001 was his contractual letter, he has sought to rely on the letter from McCormicks in relation to Mr Garnham’s contract to cover his position. This would suggest that his contract was the same as Mr Garnham’s and included the same termination clause. Mr Goldberg did not produce Mr Garnham’s contract, upon which Mc Cormicks had given advice, so that we have no means of knowing whether it was the same contract as the one ostensibly contained in the letter of 1 February 2001. We are left with two possible contracts for Mr Goldberg. The one contained in the letter of 1 February 2001 which contained a termination clause in the same terms as that advised on by McCormicks for Mr Garnham. The other relying on word of mouth, which Mr Goldberg alleges was contained in the emails. McCormicks have advised that that the termination within the terms of Mr Garnham’s contract represented a breach of contract and £30,000 of the payment would be exempt from tax. The case law referred to makes it clear that the tax exemption does not apply if the payment is made arising from an employee’s employment. The payment to Mr Garnham was apparently made in breach of contract and did not arise from his employment because there was no provision in his contract for a payment in lieu of notice. We did not, however, have sight of the entire contract so that we do not know if the advice from McCormicks was correct or not.  If Mr Goldberg’s contract had been contained in the letter of 1 February 2001 then the position might have been the same for Mr Goldberg. Unfortunately Mr Goldberg has muddied the waters. He does not accept that the letter of 1 February 2001 represents his contract. He has not produced sufficient evidence as to the contract he believes he entered into with regard to the emails. The only hard evidence before us is the letter of 6 August 2004 addressed to him, and presumably accepted by him, to the effect that the payment was in lieu of notice. There is a further letter dated 2 February 2006 from Intouch to Mr Thornton at HMRC confirming that to be the position as far as the company was concerned. As that is the case we have no alternative than to accept that the payment of £76,872 was made as a result of his employment and was a payment in lieu of notice.

8.     As to the penalty, HMRC has not established that Mr Goldberg has been negligent. We are satisfied that Mr Goldberg disclosed the position to HMRC and that he thought that he was entitled to the exemption because of the advice given by McCormicks to Mr Garnham. In any event section 95 of the Finance Act 2007 did not come into effect until 1 April 2009 and any penalty would fall within the earlier regime.

9.     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.

TRIBUNAL JUDGE

RELEASE DATE: 23 July 2010