[2011] UKFTT 242 (TC)

TC01106

Appeal number TC/2010/01213

INCOME TAX – Employer Financed Retirement Benefits Schemes (ITEPA Ch 6) – “Excluded benefits” (ITEPA s.393B) – Exclusion of non-cash benefits received in connection with the termination of employment where termination of employment prior to 6 April 1998 (Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations SI 2007/3537 Sch para 11) – meaning of “termination”

FIRST-TIER TRIBUNAL

TAX

MR COLIN SWINGLER Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: Dr Christopher Staker (Tribunal Judge)

MRS SUSAN LOUSADA (Tribunal Member)

Sitting in public in Bedford on 21 February 2011

The Appellant in person

Mr P Massey for the Respondents

DECISION

Introduction

1.     The Appellant appeals against a decision of HMRC to refuse his claim for repayment under the error or mistake relief legislation of income tax paid by him on medical benefit payments that are a part of his retirement package.

2.     Ultimately, the only issue in this appeal is the date of “termination” of the Appellant’s employment for purposes of paragraph 11(b) of the Schedule to the Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations SI 2007/3537.

The relevant legislation

3.     Section 394(1), in Chapter 6, of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), provides that if a benefit to which Chapter 6 applies is received by an individual, the amount of the benefit counts as employment income of the individual for the relevant tax year.  Section 393 of ITEPA provides that Chapter 6 applies to “relevant benefits” provided under an “employer-financed retirement benefits scheme”, the former expression being defined in s.393B. 

4.     Section 393B(1) gives a general definition of “relevant benefits”, to include “any lump sum, gratuity or other benefit (including a non-cash benefit) provided (or to be provided) ... on or in anticipation of the retirement of an employee or former employee”.  However, s.393B(2) provides that certain benefits shall not be “relevant benefits”, including “excluded benefits”.  Section 393B(3) defines “excluded benefits” to include “benefits of any description prescribed by regulations made by the Commissioners for Her Majesty’s Revenue and Customs”.

5.     The above provisions of ITEPA were substituted by the Finance Act 2004, s.249 (as subsequently amended), and came into force on 6 April 2006.

6.     The Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations SI 2007/3537 (the “Regulations”) were made pursuant to s.393B of ITEPA to define various “excluded benefits”.  Regulation 1 provides that they have effect for the tax year 2006–07 and subsequent tax years.

7.     Regulation 3 of the Regulations provides that a relevant benefit described in the Schedule to the Regulations that is paid to a qualifying person shall be an “excluded benefit”.  “Qualifying person” is defined to include an employee.

8.     Paragraph 11 of the Schedule to the Regulations describes the following benefit:

The provision of a non-cash benefit if—

(a) it was received in connection with the termination of the employee's employment,

(b)  that termination took place before 6th April 1998.

The hearing, evidence and arguments

9.     The material facts of this case are uncomplicated and largely non-contentious. The Appellant is a former employee of Barclays Bank.  On 17 December 1997, he signed an irrevocable agreement with his employer that he would retire on 7 January 2000. Until that latter date, he remained an employee of Barclays, which continued to pay his salary.  However, from 27 December 1997 until 7 January 2000 he was in fact working for a charity (a museum trust) on secondment from Barclays.

10.  Since January 2000, the Appellant has been in receipt of a pension from Barclays. As part of his pension package, he receives medical benefit payments. It is common ground that until 5 April 2006, that the medical benefit payments included in the pension package were not taxable.

11.  In 2006, the Appellant received a letter from his pension player to say that as a result of new legislation, is medical benefit payments would become taxable from 6 April 2006.  The legislation referred to would have been the Finance Act 2004, substituting the provisions of ITEPA referred to above with effect from 6 April 2006. 

12.  The Appellant duly included details of the medical benefit payments in his self-assessment tax return for 2006/07.  According to the HMRC statement of case, this return was received by HMRC on 20 May 2007.

13.  It was only after this return was filed that the Regulations were made, on 17 December 2007.  They came into force on 8 January 2008, although, as noted above, regulation 1 provides that the Regulations “have effect for the tax year 2006–07 and subsequent tax years”. 

14.  It appears that the Appellant continued to include the medical benefit payments in his self-assessment tax returns, although he does not accept that they should be taxable.  There followed various exchanges between the Appellant and HMRC.  It is unnecessary to go into the detail of those exchanges. It suffices to say that ultimately in March 2010, the Appellant submitted a claim for repayment of tax under the error or mistake relief legislation in relation to tax paid on the medical benefit payments. HMRC refused the claim on 14 July 2010, and the present proceedings are an appeal against that decision.

15.  It has not been disputed by the Appellant that the medical benefit payments that form part of his retirement package fall within the general definition of “relevant benefits” in s.393B(1) of ITEPA, and that they would be taxable unless they are “excluded benefits” for purposes of s.393B.  The only basis relied upon by the Appellant for characterising the medical benefit payments as “excluded benefits” is paragraph 11 of the Schedule to the Regulations.

16.  HMRC in turn have not disputed that the medical benefit payments would fall within paragraph 11 of the Schedule to the Regulations, but for the fact that HMRC considers that the Appellant’s employment with Barclays terminated after 6 April 1998.

17.  HMRC take the position that the Appellant’s employment did not terminate until January 2000, and that therefore paragraph 11 of the Schedule to the Regulations by its express terms does not apply to the Appellant.  The Appellant’s position is that the “termination” of his employment with Barclays for purposes of that provision occurred on 17 December 1997, when he signed an irrevocable agreement with Barclays Bank that he would retire on a specified date.

18.  At the hearing before us, the Appellant presented his case in person.  He described the circumstances of his case.  He said that the irrevocable agreement that he signed on 17 December 1997 was the only document that brought an end to his employment, and that that document when signed was binding and irrevocable.  He acknowledged that his case was in a “grey area”.  He also stressed that his case was unusual and that if the appeal were decided in his favour it would not set a precedent for large numbers of other cases.

19.  Mr Massey, who presented the HMRC case, outlined the legislative provisions referred to above.

20.  Both parties appeared to base their cases on what they considered to be the plain meaning of the wording of paragraph 11.  However, as the conflicting positions of the parties show, the wording may be fairly open to more than one interpretation.  The Tribunal raised the hypothetical example of a situation where an employer had the right to terminate an employee’s employment on 2 weeks’ notice.  If the employer gave such notice, the employee might well say “my employment was terminated today”, even though the period of employment would still continue for another two weeks.  Paragraph 11 requires that “that termination [of the employment] took place before 6th April 1998”, without specifying whether “termination” refers to the act of terminating the employment, or the cessation of the employment itself.  Put another way, it does not make clear whether it refers to the date that the employment terminated, or the date that the employment was terminated.

21.  The Tribunal asked Mr Massey whether there was any relevant definition provision in the legislation for the expression “termination” in paragraph 11 of the Schedule to the Regulations, and he said that there was not.  Mr Massey was also asked whether he was aware of any case law or other material relevant to the meaning of that term, or of any analogous areas of tax law in which the concept of termination of employment was used and had an established meaning, that might assist in providing an answer to this issue.  Mr Massey said that he was not.

22.  In the circumstances, the Tribunal gave a direction giving HMRC 28 days to file any additional material relevant to the interpretation of paragraph 11 of the Schedule to the Regulations, and giving the Appellant a further 28 days thereafter to file any response.  The direction provided that thereafter the Tribunal would proceed to issue a written decision on the appeal without a further hearing unless either party requested a further hearing.

23.  HMRC provided further written submissions dated 17 March 2011 with supporting documents.  In summary, these submit as follows.

24.  The Finance Act 2004 restructured the tax regime for unapproved pension schemes, which coincided with the introduction of a new, simpler regime for the registration of pension schemes.  From 6 April 2006, non-registered pension schemes are known as Employer Financed Retirement Benefits Schemes (“EFRBS”), defined in s.393A of ITEPA.  Under the present regime, if an EFRBS provides both “relevant benefits” and benefits that are not “relevant benefits”, only the “relevant benefits” will be taxable under s.394 of ITEPA, although the other benefits may be charged under other ITEPA provisions that are relevant to them.  Otherwise, the s.394 charge operates in the same way as before 6 April 2006, in that the benefit counts as employment income for the individual in the tax year in which it is received.

25.  The Regulations provide that certain benefits under an EFRBS that would otherwise be “relevant benefits” are to be treated as “exempt benefits”.  The purpose of this is to ensure that where benefits provided by an employer during the period of employment are tax exempt, and where the employer continues to provide those benefits after the employment has ended as part of a retirement benefits scheme, the tax exemption should continue to apply after the employment has ceased. 

26.  Medical benefits provided to employees while in employment are subject to income tax on the value of the benefits (if income is more than £8,500).  Such benefits should therefore continue to be taxable after cessation of employment under a principle of continuity of treatment.  Treating them as “relevant benefits” for purposes of s.394 of ITEPA achieves this outcome. 

27.  Section 394(5) of ITEPA provides that “No liability to income tax arises by virtue of any other provision of this Act in respect of a benefit to which this Chapter applies”.  The effect is that if medical benefits payments are taxed as “relevant benefits” under s.394, they will not be taxed under any other provision, such as provisions dealing with taxation of termination payments to employees.

28.  That is the situation following the introduction of the new regime from 6 April 2006.  The situation under the old regime was different.

29.  Under the old regime, if a non-approved scheme (then known as an “Unapproved Retirement Benefits Scheme” (“URBS”)) provided both “relevant benefits” and other benefits, then all benefits provided were subject to the URBS charge (unlike the present regime, where only “relevant benefits” provided by an EFRBS are subject to the s.394 charge, and other benefits provided by the EFRBS may be subject to other relevant tax provisions).

30.  This meant that under the old regime, if medical benefits payments were made following a termination event together with other benefits that were relevant benefits, the URBS charge would have applied to the medical benefits payments.  However, if medical benefits payments were made following a termination event without any other relevant benefits, the URBS charge would not have applied.  In that event, the medical benefits payments would have been taxed under the provisions dealing with termination payments. 

31.  The provision charging termination payments was, until 1 April 2003, former s.148 of the Income and Corporation Taxes Act 1988 (“ICTA”).  Since 6 April 2003 the relevant provision is ss.401 and 403 of ITEPA.

32.  Prior to 6 April 1998, s.148 of ICTA applied to the capital value of a non-cash benefit provided on an ongoing basis (subject to a £30,000 exemption).  From 6 April 1998, under s.148 of ICTA, and subsequently under ss.401 and 403 of ITEPA, the termination payment charge applies to the annual value of a termination payment. 

33.  The effect is that if medical benefits payments were made following a termination prior to 6 April 1998 without any other relevant benefits, the individual would have been taxed at the time of termination on the capital value of the future payments to be provided.

34.  When the new regime was introduced with effect from 6 April 2006, it was considered that to tax medical benefits payments in the situation referred to in the previous paragraph would amount to double taxation.  It was therefore decided to make such benefits “excluded benefits” under the new regime.  Originally it was intended to limit the exclusion to benefits that the taxpayer could show had been taxed previously on the capital basis.  However, it was felt that to ask for evidence of taxation, often 10 or more years after the event, was too onerous.  It was therefore decided to give a blanket carve-out from the EFRBS charge for the ongoing provision of medical benefits from a termination before 6 April 1998 irrespective of the amount of tax actually involved. 

35.  Protection against such double taxation was previously provided by s.58(4) of the Finance Act 1998, which brought about the amendment to s.148 of ICTA referred to in paragraph 32 above.  Section 58(4) of the Finance Act 1998 provided that it applied to payments or other benefits received on or after 6 April 1998, “except where the payment or other benefit or the right to receive it has been brought into charge to tax before that”.

36.  If the Appellant’s employment did not terminate before 6 April 1998, then his medical benefit could not have been taxed on the capital basis of the earlier s.148 of ICTA.  The HMRC technical area responsible for termination has difficulty envisaging how the event of signing a promise in 1997 to retire in 2000 could have amounted to a termination event under s.148 in 1997 rather than 2000.

37.  It is clear that the intention of the legislation is to refer to the timing of the employment itself finishing rather than any actions taken to arrange the finish of it.  The case of HMRC v Colquhoun [2010] UKUT 431 (TCC) discusses the meaning of “termination” in a different context and is not of assistance in the present instance.

38.  The Appellant provided further written submissions dated 21 March 2011 with supporting documents.  In summary, these submit as follows.

39.  HMRC accepted that “to ask for evidence of taxation, often 10 or more years after the event, was too onerous”.  The date of 6 April 1998 was chosen as a cut-off point in the Regulations, which were made exactly 10 years after the Appellant signed the irrevocable agreement.  HMRC have not established a definition of “termination” and the Appellant’s own opinion on the matter is equally valid to that of HMRC.  The background indicates the difficulty of making legislation that covers a situation that existed 10 years before, but does not indicate that the legislation had any particular intention.  It is agreed that Colquhoun is irrelevant.  At the time that the Regulations were made, the government realised that they were not being fair to pensioners who had taken decisions many years before.

The Tribunal’s views

40.  The Tribunal is grateful to the parties for their further submissions.  The Tribunal notes that while the detailed explanations given in the HMRC submissions are helpful, the legislative materials provided by HMRC do not in fact themselves suffice to establish each of the detailed points made in the HMRC submissions.  However, the Tribunal ultimately finds it unnecessary to decide whether it accepts the correctness of each of those detailed points.

41.  Paragraph 11 of the Schedule to the Regulations is expressed to apply only where termination of employment took place before 6 April 1998.  The date of 6 April is a common date for coming into force of new taxation provisions.  It is therefore logical to assume that the purpose of including that date limitation in paragraph 11 was to ensure that non-cash benefits that are provided now, but which were material to a tax regime in force prior to 6 April 1998, should not be taxed now as “relevant benefits”. 

42.  The question is therefore whether the medical benefit payments made to the Appellant now could in some way have been material to a tax regime in force prior to 6 April 1998.  The HMRC submission is that if the Appellant’s employment had terminated prior to 6 April 1998, he would have been potentially liable to be taxed in the tax year of termination on the then capital value of all future medical benefit payments to be made under the retirement package.  Whether or not that is the case, the Tribunal finds nothing in the material before it to suggest that the Appellant could have been liable to tax on his retirement benefits in 1997, when he entered into the irrevocable agreement to retire.  The Tribunal finds nothing else to suggest that the benefits that were to be provided in his retirement package from January 2000 could in any way have been relevant to his tax position between the date of the irrevocable agreement and 6 April 1998. 

43.  A reason for taking the date of termination to be the date of the act bringing about the termination of employment, rather than the date of cessation of employment, would be to preserve the expectations of parties at the time of acting to terminate the employment.  However, the Appellant has not identified anything that changed on 6 April 1998 that would have affected his expectations at the time that he entered into the irrevocable agreement to retire.  What affected his expectation were the changes made commencing on 6 April 2006, rather than any changes commencing on 6 April 1998. 

44.  As indicated above, the issue in this case is whether the concept of the date termination of employment in paragraph 11 of the Schedule to the Regulations refers to the date of the act terminating the employment, or the date of cessation of the employment itself.  All else being equal, the Tribunal considers that on a simple plain reading of the wording of the provision, the latter would be the more natural understanding of the wording.  While this is not decisive, it is a further factor weighing in the Tribunal’s consideration.

45.  On its consideration of the case as a whole, the Tribunal finds that for purposes of paragraph 11 of the Schedule to the Regulations, the termination date of the Appellant’s employment was not the date in 1997 on which he signed the irrevocable agreement, but rather the date in 2000 on which he ceased to be an employee of Barclays.

Conclusion

46.    For the reasons above, the appeal is dismissed.

47.    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.

Christopher Staker

TRIBUNAL JUDGE

RELEASE DATE: 12 April 2011