First-tier Tribunal (Tax)

[2010] UKFTT 424 (TC)

TC00693

Appeal number: TC/2009/16145

Income Tax – Appellant sub-postmaster receiving termination payment on closure of sub-post office - was this compensation solely for loss of capital outlay on purchase price of business and not in connection with loss of office as a subpostmaster - no - or compensation for loss of office for the purposes of s401 ITEPA subject to s403 ITEPA exemption and therefore employment income - yes - appeal dismissed

FIRST-TIER TRIBUNAL

TAX

ANTHONY CUDE Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: BARBARA J KING (TRIBUNAL JUDGE) SIMON NEWTON

Sitting in public in Leeds on 19 July 2010

Mr Christopher Maslen, accountant for the Appellant and Mr James Osborne of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

The Issue in dispute

1.       This appeal relates to the tax treatment of a compensation payment of £75,107.61 (“the Termination Payment”) paid by the Post Office Limited to the Appellant, Mr Cude,  on 15 June 2004 when his Post Office branch closed as part of a Network Reinvention Programme.

2.       The Appellant argues that the whole of the Termination Payment should be treated as a capital payment to his wife and himself in equal shares in respect of their disposal of the goodwill of their partnership business upon closure of their sub-post office and shop.

3.       HMRC argue that, subject to an exemption of £30,000 under s.403, the payment counts as employment income of the Appellant under s.401 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).  

The Evidence

4.       HMRC had provided a bundle of documents which included many letters provided to them by the Mr Cude. These included correspondence involving the purchase of Haddingley Hill Post Office in 2000, and letters exchanged between the Appellant and the Post Office Ltd between April 2002 and 2004. Mr Cude attended this hearing and gave oral evidence. He also produced a copy of some ‘Details of Sale’ for Haddingley Hill Post Office, which is dated 02 May 2002.

5.       The Appellant and his wife had purchased Haddingley Hill Post Office in Wakefield, on 14 September 2000. The Purchase price was £69,950 and legal costs came to £672.53.  Mr Cude entered into a contract with the Post Office Ltd to become the subpostmaster for Haddingley Hill Post OfficeHill Hill Post OffuiHi. His original contract was not available to the Tribunal but HMRC produced a September 1994 version of a Post Office Counters Ltd contract which Mr Cude agreed contained similar terms to those under which he was appointed ( the “Standard Contract”).

6.       On 9 April 2002, Post Office Ltd wrote to Mr Cude giving details of a Network Reinvention Programme and telling Mr Cude that his post office branch was in an urban area and could be involved in a possible closure. The letter included the following paragraphs :-

“Post Office Ltd has reached a provisional agreement in principle with the National Federation of Subpostmasters on the level of compensation which would be offered to subpostmasters leaving the network under the Network Reinvention programme. This will be funded by the Government and as European and UK clearances have yet to be confirmed, you will understand that we are not in a position to guarantee the outcome. However we have proposed that any subpostmaster leaving the network would receive a payment equivalent to 28 months of their remuneration.

This amount is intended to help compensate urban subpostmasters leaving the network for loss of business and investment, and for any exit costs which they may incur. Our proposals for the scheme are based upon the long-standing arrangements which have been operated by the Post Office Ltd and the National Federation of Subpostmasters through the Joint Discretionary Fund.”

7.       No correspondence about the agreement between the Post Office and the National Federation of Subpostmasters has been produced to this Tribunal.

8.       Mr Cude gave evidence that he took this letter to mean that if he chose to close his branch he would be offered compensation for the loss of his business and investment. He did not consider that it would be compensation for loss of office. He completed a “Network Reinvention - preference form” on 10 April 2002 stating that he would prefer his branch to close and for him to receive compensation for its closure. He further stated that he was considering selling the business and the “Details of Sale” were produced on 02 May 2002. These details include “Price: £75,000 and Post Office Salary £33,750.”

9.       On 12 March 2003 the Post Office Ltd again wrote about the proposed compensation. The letter sets out an alternative method of calculation of compensation based upon “... what you paid for the business.....”.  The letter goes on to point out that the alternative method of compensation will be compared with the calculation of 28 months’ equivalent remuneration method and the level of compensation offered will be set at the lesser of the two amounts.

10.    On 27 May 2003 the Post Office Ltd indicates that the “business value method” of calculating compensation is taking longer to process and they now propose a fixed sum based on a sliding scale. The Appendix shows that, on this basis, the offer which would be made to Mr Cude, would be £32,363.22.

11.    On 1 June 2003 Mr Cude indicates that he opts for the “business value compensation, as the fixed scale calculation would mean a severe and unacceptable loss of monies invested in this business.”

12.    On 7 November 2003 the Post Office Ltd makes a conditional offer to Mr Cude in

“the sum of £75,107.71 in relation to the closure of your Post Office® Branch”.

Further on in this letter the question of tax is raised for the first time as follows:-

“that part of the total payment which relates to compensation for loss of office will be chargeable to tax under Section 148 Income and Corporation Taxes Act 1988 and attract the exemption, up to a maximum £30,000 contained in Schedule 11 of the same Act...........”

13.    There appears to be no calculation as to how this figure was reached and Mr Cude gave evidence that he did not ask for one. He looked at the figure and thought it was in the region of what he had been asking when the business had been put up for sale and he and his wife were therefore prepared to accept it. He did not ask what part of the compensation offer might be subject to tax because he did not consider that any part of it was for loss of office but only for loss of business.

14.    The Haddingley Hill Post Office closed on 7^th June 2004 and Mr Cude was sent an undated  “Pay Advice”, which records :-

“ 001 Network Re-Invention Payment  £75,107.7”

and does not mention the words compensation or loss of office. Mr Cude has, subsequent to the receipt of this letter, written the word ‘Compensation’ across the top.

The Appellants arguments

15.    Mr Maslen, on behalf of the Appellant, argued that the payment of £75,107.70 should not be held to be employment income because

a.      The Standard Contract included a clause that no compensation could be paid to a subpostmaster for loss of office

b.     Much of the correspondence between Mr Cude and The Post Office Ltd referred to compensation for loss of business and investment, and nowhere was the phrase compensation for loss of office mentioned. Therefore all of money should be seen as compensation for loss of business and investment.

c.      In their letter of  9 April 2002 the Post Office Ltd had asked Mr Cude whether he would consider investing any of his possible compensation in another Post Office Branch, thus suggesting that it was a payment of capital available for capital investment

d.     Mr Cude resigned voluntarily and could not therefore be compensated for loss of office.

e.      The tax treatment of any payment does not depend on how the payment was calculated but rather on what the payment was for and therefore the any references to 28  months remuneration do not affect the status of the compensation

HMRC Arguments

16.    Mr Osborne, on behalf of HMRC, argued that

a.      The offer of compensation was not made under the terms of the Standard Contract but under the terms of the Network Reinvention Programme.

b.     Although no precise calculation has been produced showing how the amount of compensation was calculated, the correspondence between Mr Cude and The Post Office Ltd shows that it is likely to have been compared, in  the final stages to a figure based on remuneration. In the absence of a calculation showing that all of the compensation offered was based purely on the loss of business and investment, it should all be found to be for loss of office.

c.      The letter of 9 April did not by itself suggest a capital payment.

d.     Mr Cude was allowed to resign voluntarily but he did so because he was offered compensation in connection with his loss of office.

e.      Agreed that the tax treatment of any payment does not depend on how the payment was calculated but rather on what the payment was for.

Decision

17.    We were concerned that the correspondence between the Appellant and the Post Office Ltd does not make it clear to the Appellant whether the compensation was being offered for loss of office, or for loss of business and investment, or both. Tribunal decisions TC 00484 and TC 00516 were produced to us and both contained details of letters from the Post Office Limited to the respective subpostmasters involved in each of those cases. In TC 00484 the offer letter is dated 20 August 2004 and in TC 00516 the offer letter is dated 16 March 2004. In each of these letters it is clearly stated that the compensation being offered is for loss of office. No explanation has been obtained from Post Office Ltd as to why the wording is different in the earlier letter, dated 7 November 2003 to Mr Cude.. Mr Maslen stated that he had written to the Post Office Ltd asking for clarification as to the intention behind their offer of compensation but no reply had been received.

18.    On balance we find that there is no evidence to suggest that the intention of the Post Office Limited changed between November 2003 and March 2004.

19.    The letter of 7 November 2003 to Mr Cude does contain, in paragraph 2.7, an oblique reference to loss of office and tax. It did not occur to Mr Cude to query the meaning or significance of this paragraph as he did not consider that any of his offer of compensation was for loss of office.  It may be that other subpostmasters who received this earlier version of the offer letter raised queries which resulted in the wording of the offer letter being changed. The change did not however clear up all misunderstandings – as is evidenced by the other appeals. In this appeal the Appellant Mr Cude, went on believing that all of the compensation being offered was a capital sum and would be treated as such for tax purposes. Was he right to do so?

20.    Mr Cude had the option of selling his business as a going concern, and he was entitled to ask for a sale price which included goodwill and stock. His stock of cards was said to be worth only £2,000 in the ‘Details of sale’ produced in May 2002. The goodwill of those who liked to buy a card when they came to the Post Office branch, may not have been valued at a very high figure. The remaining value of what he had to sell was the goodwill which attached to the position of subpostmaster which brought in a ‘Post Office salary’. It was not technically a salary, as subpostmasters are office holders and not employees of the Post Office Limited but we note that the ‘Details of sale’ refers to it in these terms. 

21.    When the business did not sell, Mr Cude agreed to close the Post Office branch. He then lost his position as subpostmaster and he lost the ability to sell the goodwill attached to that position. We find that compensation was offered to cover these losses ie it was paid either for the loss of office or in connection with the loss of office.

22.    We find that the compensation offered was not intended to compensate directly, pound for pound, for loss of business and investment. A subpostmaster who had paid more than the business was worth was not likely to be compensated for his investment in the business in the first place. The capping of 28 months remuneration was intended to reflect this. When he accepted the compensation Mr Cude and his wife were still entitled to keep their stock of cards and to take with them, if they went on to open a card shop, the goodwill which attached to those items.

23.    We find that the £75,107.61 compensation paid to the Appellant on 15 June 2004 was received directly or indirectly in consideration or in consequence of or otherwise in connection with his loss of office. We find that Mr Cude is not precluded, under his contract, from receiving this compensation under the Network Reinvention programme. It was received by Mr Cude in his capacity as a partner with his wife in partnership. Under s 401(1) ITEPA, all of it is classed as having been received by Mr Cude and subject to a £30,000 exemption under s 403, the remaining £45,107.61 is subject to tax as employment income of Mr Cude. The Appeal therefore fails.

24.    As mentioned in paragraph 17 above we were concerned that the correspondence between Mr Cude and the Post Office Limited did not alert Mr Cude to the fact that his compensation was being paid for loss of office or in connection with loss of office, save for the oblique reference referred to in paragraph 19 above. In addition his appeal has taken some considerable time to be heard. We would hope that both these factors could be taken into account by HMRC when any steps are taken to recover any additional tax and interest due as a result of this decision.

25.    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.

Barbara J King

TRIBUNAL JUDGE

RELEASE DATE: 7 September 2010