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Cite as: [2005] UKSPC SPC00520, [2005] UKSPC SPC520

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Trustees of Barclays Bank Pension Fund v Her Majesty's Revenue and Customs [2005] UKSPC SPC00520 (29 December 2005)

SPC00520

Retirement benefits scheme – arrangements – past services

THE SPECIAL COMMISSIONERS

BARCLAYS BANK PLC

TRUSTEES OF THE BARCLAYS BANK PENSION FUND Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: I J GHOSH

Sitting in public in London on 20 July 2005

Mr Jonathan Peacock QC for the Appellant

Ms Ingrid Simler for the Respondents

DECISION

This is an appeal by Barclays Bank plc ("plc") and the Trustees of the Barclays Bank Pension Fund ("the Trustees") against determinations of liability to account for PAYE to HM Revenue & Customs for the tax years ending 5^th April 1998, 1999 and 2000, for £2,065,594.71, £201.66 and £316.88 respectively. The determinations were made under regulation 49 of the Income Tax (Employments) Regulations 1993 (Statutory Instrument 1993/744) ("the 1993 Regulations") on 4^th August 2003. The determinations were made exclusively on the Trustees of the Barclays Bank Pension Fund, a significant fact to which I return below.

The Issues

Barclays Bank plc made certain voluntary payments on or about 23 March 1998 to pensioners who had retired from employment with Barclays Bank plc on or before 31 December 1998. Her Majesty's Revenue and Customs ("HMRC") consider that these payments are taxable on the pensioners as benefits provided under a non approved retirement benefits scheme under the Income and Corporation Taxes Act 1988 ("TA 1988"), section 596A. If this is correct, a liability to account for Pay As You Earn ("PAYE") arose for the years 1997/98 to 1999/2000 inclusive, under the 1993 Regulations, Regulation 49, on "the employer." It is common ground that plc was "the employer". But the determination was only made on the Trustees. The Trustees were not the "employer". No determination was made on plc. So the issue also arises whether the Trustees' appeal succeeds as a matter of principle. Put in their logically correct order, the two issues are therefore:-

(i) Whether the determination on the Trustees, not being a determination on the "employer", means that the appeal succeeds ipso facto, since the Trustees have no liability under regulation 49 at all. This issue goes to my jurisdiction ("the jurisdiction point").

(ii) If (and only if) the answer to the first issue is "no", were the voluntary payments made by plc to the pensioners indeed benefits from a non approved retirement benefits scheme within TA 1988, section 596A ("the substantive point")?

Mr Jonathan Peacock QC appeared for the Appellants. Ms Ingrid Simler appeared for the Respondent. The parties produced an Agreed Statement of Facts. The only witness called by the Appellants was Mr Mark Hodgkinson, the Group Pensions Manager for the Appellants at all material times. Mr Hodgkinson spoke to and confirmed a witness statement. Mr Hodgkinson was cross-examined by Ms Simler. Mr Hodgkinson was not re-examined by Mr Peacock. I find that Mr Hodgkinson was a reliable witness.

The Facts

The Barclays Bank UK Retirement Fund provides pensions for former employees of Barclays Bank plc and its subsidiaries ('the Group'). At the material times, the Group had approximately 77,000 employees. This appeal concerns a sub-set of the pensioners (and their widows and widowers) of the Group, that is, approximately 13,500 former employees who had retired or agreed to retire before 31^st December 1988, and their widows and widowers. I call this sub-group 'the Pensioners', although they are only a sub-set of all the pensioners of the Group, and although the sub-set includes the widows and widowers of pensioners proper.

The pension entitlements of the Pensioners are set out in the 37^th and 38^th Deeds of Variation of the Barclays Bank UK Retirement Fund, dated 12^th March 1997 and 7^th October 1998 respectively. These Deeds set out for the relevant periods the contractual rights of the Pensioners and the governance processes applicable to those rights.

In addition to those contractual rights, the Group has provided, on a concessionary basis, the Pensioners with free tax-related services from the company in the Group that specialised in the provision of such services, Barclays Bank Trust Company Limited. It is common ground that these services were indeed provided on a concessionary basis. The Group had provided, from 2^nd August 1955 onwards, on this concessionary basis, widows of pensioners with free executor and trustee facilities and, from 23^rd July 1956 onwards, free help in the preparation of their Income Tax Returns from the Income Tax Returns and Claims Department. The Group decided on 8^th March 1977 to extend the concession, by offering, from 6^th April 1977 onwards, the same free tax services to pensioners as were previously available only to their widows. On 15^th November 1977 a circular was sent to all members of staff of Barclays stating that the concession would be extended as decided. The notice stated that "[the] concession detailed above will continue until further notice. They are a privilege and not part of the terms and conditions of service." The concessions were frequently re-iterated, for example in the Barclays Brochure circulated to pensioners, entitled "Facilities Available to Pensioners" dated April 1987, paragraph 9 of which is as follows:

"Income Tax Facilities

Pensioners and their widows and widowers will be entitled to receive:

i) Preparation of Income Tax Returns free of charge.

ii) Deceased Estates – Returns to the date of death. Where the Trust Company is acting as Executor or Administrator no charge will be made."

("Trust Company" refers to the Barclays Bank Trust Company Limited referred to in paragraph 11 of the brochure.)

By letters dated 15^th September and 11^th October 1988 the Chairman of Barclays, Mr J G Quinton, wrote to the then pensioners informing them of the Group's decision to withdraw the concessions. There was considerable resistance to this decision from the pensioners and the trade union, which threatened legal action. There was also considerable negative coverage of the decision in the media. On 3^rd March 1989, Mr Quinton wrote to the pensioners re-instating the concessions for pensioners who "retired or accepted an offer of early retirement before the 31^st December 1988" and their widows or widowers. The letter continued: "[whether] we continue giving concessionary benefits will depend upon the Bank's performance in future years."

In 1997 the Group considered selling the Barclays Personal Taxation Service ('BPTS'), a wholly owned subsidiary of Barclays Bank Trust Company Limited. This was known as "Project Chatham". Mr Mark Hodgkinson, in response to a request from Sally Bott, head of Human Resources at the Group, for an estimate on "the level of compensation we should offer eligible pensioners when the taxation service is withdrawn", wrote a Note dated 27^th June 1997. The Note went through the history of the withdrawal and re-instatement of the service in 1988-1989. On the position as it then stood, the Note stated that "[we] propose to compensate eligible pensioners for the loss of their expectation of the service continuing." I infer from this Note that Mr Hodgkinson was aware of the need to avoid the kind of reaction that had been elicited in 1988-1989 from its terms: "[the] object [of the compensation] must be to put into the hands of the eligible pensioners just enough cash that they feel they have been fairly treated and consequently are not motivated to take hostile action."

Mr Mark Hodgkinson prepared a Briefing Note for the Group Executive on 3^rd July 1997 on the consequences of such a sale on the Group's treatment of the Pensioners. The Briefing Note states that the cost to the Group of providing the tax services to the Pensioners in 1996 was approximately £2.3m. Cases were classified into "simple", "average" and "complex". In 1996, of the 7,874 Pensioners who made use of the service, 3,692 cases were simple, 3,863 average, and 319 complex. The charges for simple, average and complex cases were £214, £349 and £645 respectively. 5,696 eligible Pensioners and their spouses did not use the service at all. The Briefing Note stated that the "net present value of the future liability to provide the service has been estimated by Barclaytrust at between £18.8m and £32.4m." (The lower figure assumes that only those who used the service would continue to do so, the higher figure that all the Pensioners would do so.) The Briefing Note examined possible solutions. One was to sell the business with a contract to provide the service to the Pensioners. Another was to sell the business and put the pensioner business out to competitive tender. Another was to offer the Pensioners the choice of a continued free tax service or compensation for loss of eligibility to use the service. Only one of the possibilities did not necessarily involve compensation: to "[withdraw] the pensioner tax service and determine whether compensation should be provided (and to what extent)." However, the Briefing Note states that "fair treatment would suggest that either the Bank continues to honour the pensioners' expectation of receiving this service or ensuring that some appropriate degree of compensation is offered." Indeed, the Briefing Note states that the latter option would be resisted by a "significant minority" of the Pensioners, and "would lead to a repetition of events which followed the withdrawal of the service in 1988 and would in all likelihood lead to a public row, unflattering media coverage and (probably) to action against us through the courts". The Briefing Note expressed scepticism about the appropriateness of a sliding scale of compensation, as this would be very difficult to calculate. It would have to be based on whether or not the service was currently used, expectation of future use of the service, the complexity of individual tax affairs, and the capability of the Pensioners to complete their tax returns. Furthermore, Mr Hodgkinson noted that a sliding scale would most benefit those who had already extracted the greatest benefit from the concession. The Briefing Note stated that "[we] should accept that we have an obligation to provide a free taxation service to these pensioners." The solution offered in the Briefing Note was to offer the Pensioners a cash sum in compensation for their loss of rights, which he estimated at £500, on the basis that it should not be "considered derisory". The Briefing Note expressly declined to offer an opinion on whether it was commercially possible to sell BPTS with the Pensioner concession intact.

On 9^th July 1997, at a meeting of the Executive Committee, the question of how to compensate the Pensioners was discussed, in view of the proposed sale of Barclays Personal Taxation Service ('BPTS'). The minute of this meeting records that compensation of £500 was considered for all the Pensioners, even if they did not use the service, and to be increased in line with the complexity of their tax affairs.

According to an internal memo from Jane Platt (who appears from the letterhead to have been employed by BPTS), it was decided at a Group Executive Meeting dated 9^th July 1997 to compensate the Pensioners "eligible for the benefit on a sliding scale relating to the use made of it". The memo stated that the "action points" resulting from the meeting included a decision that "Mr Mark Hodgkinson is responsible for calculating what this sliding scale might be."

The table was included in a Note for the Group Executive Committee dated 6^th August 1997 entitled "Project Chatham – Pensioner Concessions", from the Human Resources department. The Note proposed a minimum payment of £200 and a maximum payment of £2,000 for the Pensioners. The table prepared by Mr Hodgkinson came in two parts. The first part consisted of three columns, under the headings 'Pensioners', 'Widow(er)s' and 'Total' respectively. This table simply set out the numbers of the Pensioners eligible for payments. Under each column, the pensioners and widow(er)s were divided into ten age groups, from 'under 50' to 'over 100'. The number of pensioners is 9,558 and the number of widow(er)s is 3,193. The total is 12,751. There is a note to the effect that "these numbers are lower than previously advised due to attrition and the removal of non-qualifying pensioners" (this was later revised upwards, as the number of actual recipients of the compensation payments show). The second table is divided into eight columns. There are two sub-headings: 'pensioners' and 'widow(er)s'. Each is split into four columns: 'non-user', 'simple', 'average', 'complex'. There are eight rows, dividing the Pensioners into eight age categories, from 'under 60' to 'over 90'. Under each column, the amount of the proposed payment declined with advancing age of each category of Pensioner. The starting payment for an under 60 non-user pensioner is £345, which declines to £200 for those aged 80 and over. The starting payment for pensioners under 60 with simple, average and complex cases are £676, £1,421 and £2,000 respectively. The lowest payments for each category (i.e. for those who are over 90) is £200, £278 and £524 respectively. Starting payments for widows and widowers under 60 range from £288 for the non-users to £2,000 for those with complex cases. The lowest payments range for that general category from £200 to £563.

On 6^th August 1997, a meeting of the Executive Committee of the Group was held, at which it was agreed to sell the Barclays Personal Taxation Service ('BPTS') within a short timescale. The minute of the meeting records that the costs "associated with compensation for the concessionary clients of BPTS, namely Barclays Group pensioners who retired prior to 1988" would be "some £7 million in addition to closure costs." The sale price of BPTS was estimated at £4.7 million, although it was noted that if an agreement could be reached with the "concessionary clients" whereby they would remain part of the book of the business, then "additional value may be found." At the meeting, according to the minute, "the Committee discussed the table for the proposed payments at specific ages for pensioners and widowers and it was felt that it would be helpful to widen the differential between the categories. For example, it was agreed that care should be taken to ensure that non-users of all ages should not receive greater compensation than a user of the service." The minute also records a discussion of the proposed sequence of events, and states that "[it] was also felt that concessionary clients should not be informed of their goodwill payments until after the sale had been announced." It was noted that the unions would need to be informed of the sale of BPTS before the sale, and that "communications would need to be handled with care to avoid repetition of the difficulties experienced in 1998."

In a document entitled "Project Chatham - Q&A's", dated 6^th August 1997, in response to the question "Why have you decided to remove the pensioner concession?" the answer is, in part, "We are making goodwill payments to pensioners in recognition of the inconvenience and in accordance with the Bank's policy of treating all members of staff, both past and present, fairly."

On the 11^th September 1997 Sally Bott wrote to all the Pensioners informing them of the Group's decision to sell Barclays Personal Taxation Service ('BPTS') to a third party, as a result of a review of its business that had concluded that BPTS "does not fit strategically with the Group's long-term objectives." The letter explained that the service that BPTS had provided pursuant to the 1997 concession would, as a result of the envisaged sale, no longer be available to the Pensioners. The letter assured the Pensioners that "Barclays will seek to sell the business to a purchaser able to provide a similar taxation service to that provided by BPTS and will make every effort to arrange favourable terms for pensioners who choose to use it." The letter states that "as a gesture of goodwill, the Bank intends to make special one-off payments to all those currently eligible to make free use of the taxation service. Those eligible will be advised of the details of the payments as soon as possible once discussion now underway with the Inland Revenue (to clarify the tax treatment of the payments) have been concluded." The letter referred to a helpline which the Pensioners could use "to raise any issues relating to [their] tax affairs as a result of this letter."

In a note to Sally Bott dated 19^th September 1997, entitled "Project Chatham –Staff Pensioner Reactions," Mr Hodgkinson summarised the Pensioners' reactions to the 11^th September letter. 164 calls had been made to the helpline, 37 of which were complaints about the withdrawal of the service. Approximately twenty letters were written. Mr Hodgkinson said that "[the] overall message from the correspondence is that whilst there is great disappointment there is also resignation that the service is to be withdrawn." Mr Hodgkinson also noted that he was "somewhat surprised by the relatively muted response to the whole issue", but said that there were two factors that were probably responsible for this, the recognition that the withdrawal of the service was caused by the sale of the business and the expectation of an (as yet unspecified) compensation payment.

The Group failed to reach agreement with the Inland Revenue (as it was then; for convenience I will continue to refer to what is now HMRC as "the Revenue") concerning the tax treatment of the payments it wished to make to the Pensioners. The Revenue indicated in a letter dated 3^rd October 1997 that its view was that the sums paid to the Pensioners would be taxable. The Revenue held to its view, in spite of attempts by the Group to persuade it to change its position.

In a letter dated 18^th December 1997, Sally Bott informed the Pensioners of their compensation payments ('the Payments') and promised that they would be paid on 23^rd March 1998. Rosemary Kwok, the UK Pensions Policy Manager at Group Human Resources, sent a further letter dated 16^th March 1998 to the Pensioners, reminding them of the Payments, advising that they need not enter the Payments on any tax self-assessment form for that year, and that if the Payments were held to be taxable, the Bank would meet any basic rate liability up to 23%.

The Group made the majority of the compensation payments to the Pensioners in the week commencing 23^rd March 1998, through the Group's monthly pensioners' payroll, without deduction of tax or NIC. On 14^th April 1998, the Group notified the Revenue that the provisional Payments made totalled £6,486,850, distributed among 13,521 Pensioners. (It thus appears that the numbers in the table prepared by Mr Hodgkinson had been too low.)

In a letter dated 28^th June 2001, the Revenue confirmed its view that "the payments made to the pensioners…are taxable within the provisions of section 596A ICTA 1988" and that "Barclays should now meet its PAYE obligations by preparing and submitting a supplementary P35 to account for all those payments and associated tax on those payments." On 4^th August 2003, the Revenue issued the three notices of determination under appeal.

Mr Hodgkinson's Evidence

Mr Hodgkinson gave the following responses to questions put to him by Ms Simler, which I consider relevant to this appeal:

(i) The "obligation" referred to in the Briefing Note dated 3^rd July 1997 was a reference to a "moral obligation" to make the Payments to the Pensioners;

(ii) The calculation of the table of a sliding scale of Payments to be made to the Pensioners included in the Note for the Group Executive Committee dated 6^th August 1997 was the result of considerable work and "intense activity";

(iii) The "muted response" of the Pensioners to the letter of 17^th September 1997 telling them of the prospect of the withdrawal of the free tax related services (referred to in Mr Hodgkinson's Note to Sally Bott dated 19 September 1997) was due to the Pensioners' expectation of compensation;

(iv) The decision to make the Payments was a commercial one. The decision was made to avoid the hostility of the Pensioners and the trade unions.

I find, as a result of the facts found by reference to the documents put before me and Mr Hodgkison's evidence, that:

(i) The Payments were motivated by a combination of moral duty and a commercial desire to avoid hostility of the trade unions;

(ii) The Payments were calculated on a planned, commercial basis, by reference to the complexity of the tax affairs of the Pensioners;

(iii) The calculation of the Payments was completed on a careful basis and only after considerable work and intense activity.

(iv) In so far as it is a question of fact. I find that the Payments were not made in consideration of any past services provided by Pensioners who had been employees of plc but rather to compensate the Pensioners for loss of the tax related services.

Decision

The jurisdiction point: the absence of a determination on plc

After making his submissions on the merits of the case, outlined below, Mr Peacock made a fundamental submission about jurisdiction. There had been no indication in the Appellants' executive summary of their case (dated 24^th November 2004), nor in their skeleton argument (dated 13^th July 2005), that this point would be taken. The point was raised for the first time during the course of Mr Peacock's oral submissions. Mr Peacock's point is that the regulation 49 determinations were made on the wrong party. All three determinations are made on the Trustees. Even if section 596A of the Income and Corporation Taxes Act 1988 ('ICTA') applies to the payments, liability to tax is that of the "employer", which term does not, on any view, include the Trustees. If the Appellants succeed on this procedural point, it is determinative of the matter.

Ms Simler objected to this point being taken at this late stage. Mr Peacock said that the point had been raised in the pre-litigation correspondence but I agree with Ms Simler that this is neither here nor there. The point had not been made by Mr Peacock anywhere in his Skeleton Argument. No notice had been given that the Appellants were going to raise this point at this hearing.

I have considerable sympathy with Ms Simler's position. The trouble is that this point goes to jurisdiction. If the determination is on the wrong party who has no liability then I have no jurisdiction to hear the substantive point at all. The Trustees' appeal would have to succeed. It follows that I must address this point.

Mr Peacock, on reflection and after consultation with Ms Simler, conceded that the absence of a determination on plc did not deprive me of jurisdiction. Mr Peacock said that he was now aware that the Payments made to the Pensioners, although made by plc, were made "by or under" the Trustees in that the Trustees' payroll had been used by plc in making the Payments to the Pensioners. The Trustees were "employers" or alternatively "intermediaries" for the purposes of the PAYE regime, according to Mr Peacock. Thus the Barclays Bank Pension Fund had an obligation to account for monies which had to be deducted under the PAYE regime by reason of Regulations 40 and 41, if the Payments were within the scope of section 569A. A determination could therefore be made on the Trustees under Regulation 49. Mr Peacock therefore conceded that there was no fundamental issue on jurisdiction and undertook not to raise this point again should the matter go further. Ms Simler was content with this resolution of the jurisdiction point.

I am troubled by this submission. The liability to deduct monies under the PAYE regime falls on the "employer" : Regulation 6 of the 1993 Regulations. "Employer" is defined as the person who either actually employees the employees in receipt of monies subject to PAYE (TA 1988, section 203B(1),(4)) or any person who "makes" or "pays" such monies : TA 1988, section 203(1), Regulation 2(1) of the 1993 Regulations. Even if a payment is made by or through an "intermediary" within TA 1998, section 203B(4), it is only the "employer" who is liable under the PAYE regime : section 203B(1). So an "intermediary" is only liable under the PAYE regime if the intermediary is himself an "employer".

Here, if plc had put the Trustees in funds and requested the Trustees to make the Payments to the Pensioners, the Trustees would be "employers" within TA 1988, section 203(1) and Regulation 2(1) of the 1993 Regulations. But the facts before me are that plc, having planned to make the Payments, done the work to calculate their quantum and communicated the fact that plc intended to make the Payments to the Pensioners, used the Trustees' payroll to make the Payments (by which I assume it is meant that the mechanism to pay the Payments to the Pensioners was the payroll usually used by the Trustees to pay pensions payments to the beneficiaries of the Barclays Bank Pension Fund Trust). The inference arises that plc simply requested the Trustees to deliver the Payments made by plc to the Pensioners in a convenient way.

Thus it seems that Mr Peacock's concession cannot confer jurisdiction on me. The Trustees, on the facts of this case, are not "employers" for TA 1988 purposes or the purposes of the 1993 Regulations and have no liability under Regulation 49 of the 1993 Regulations. The Trustees' appeal therefore succeeds. I address the substantive point, however, in case I am wrong on the jurisdiction point. It would be wholly misguided of me to fail to consider the substantive point given that both Counsel accepted that I do have jurisdiction and that this matter may well go further. I have had to consider the jurisdiction point despite Mr Peacock's concession since if I am correct about the jurisdiction point, jurisdiction cannot be conferred on me by concession. And there is at least the prospect of this matter going further and the jurisdiction point only emerging before a higher Court which takes the point of its own motion. The parties are of course free to make further submissions above on the jurisdiction point and if necessary the matter can be remitted to the Special Commissioners if, in the light of those further submissions, further facts need to be found.

The Substantive Point

The Law

The relevant statutory provisions in force at the material times were as follows.

TA 1988, Section 596A(1) provides that:-

"Where in any year of assessment a person receives a benefit provided under a retirement benefits scheme which is not of a description mentioned in section 596(1)(a), (b) or (c), tax shall be charged in accordance with the provisions of this section."

Definitions are contained in sections 611 and 612 ICTA, the relevant parts of which provide:

"611 Definition of "retirement benefits scheme

(1) In this Chapter "retirement benefits scheme" means… a scheme for the provision of benefits consisting of or including relevant benefits, but does not include—

(a) any national scheme providing such benefits…

(2) References in this Chapter to a scheme include references to a deed, agreement, series of agreements, or other arrangements providing for relevant benefits notwithstanding that it relates or they relate only to—

(a) a small number of employees, or to a single employee, or

(b) the payment of a pension starting immediately on the making of the arrangements.

612 Other interpretative provisions, and regulations for purposes of this Chapter

(1) In this Chapter, except where the context otherwise requires—

…"relevant benefits" means any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or in anticipation of retirement, or, in connection with past service, after retirement or death…"

I record both parties' arguments below.

The Appellants' Submissions

The Appellant contends that the Payments were compensation for the loss of the services to the Pensioners, which were not themselves taxable.

The provision of the tax services from 1977 to 1997 to the Pensioners was not taxed on the ground that it was an ex gratia service, and not any kind of emolument or pension liable under Schedule E. There was no dispute in this case about whether this was the correct tax treatment of the provision of the services.

Mr Peacock stated that the payments did not fall under s 596A ICTA. The natural target of that section, he submitted, was a plan designed to provide regular benefits or sums in commutation of pensions to a class of people on a continuing basis. It was not designed to catch the one-off provision of a benefit to members of a class of people, particularly not where the rationale for the payment is unconnected with retirement or past service. Mr Peacock gave the following four reasons for this interpretation of the reach of s 596A. (1) s 596A does not apply where such a scheme is within one of the approved categories in s 596. Such approved schemes are themselves continuing schemes. Given that a one-off payment to some members of a class could thus not form the basis for an approved scheme, it is inherently unlikely that such a payment could fall under s 596A. (2) The term "retirement benefits scheme" refers to benefits in the plural, and thus implies a continuing process rather than a one-off payment. (3) Another type of scheme excluded from the ambit of a "retirement benefits scheme" is a "national scheme" (s 611(1)), which is also continuing, and thus not intended to cover one-off payments. (4) Specific provision is made in s 611(2) to make it clear that a scheme can relate only to a single employee. One would therefore expect similar express provision to be made for one-off payments, if the section was to catch such payments, but no such express provision is made.

Mr Peacock supported his argument that one-off payments were not caught by referring to the legislative history of section 596A. The section was introduced into ICTA by the Finance Act 1989 (Schedule 6, paragraph 9), to provide for "top up pension schemes" where an employer wanted to provide more generous pension benefits than those which were available under approved schemes. In view of this history, it would require particularly clear words before one could conclude that the section was designed to catch one-off payments.

Mr Peacock further argued that in this instance, there was no "scheme" for the purposes of s 596A; that even if there was a "scheme" there was no provision of "relevant benefits"; and finally that since the provision of tax services to the Pensioners was not taxable, a payment made in lieu of that service should not be taxable either.

With regard to the argument that there was no "scheme", Mr Peacock submitted that the definition of "scheme" in s 611(2) was exhaustive, even though it used the word "including". Mr Peacock relied on Dilworth v Commissioner of Stamps [1899] AC 99, for the proposition that a definitional section (in that case s 2 of the Charitable Gifts Duties Exemption Act 1883, defining "charitable purposes") which states that the defined term "includes" certain things, may be interpreted as either non-exhaustive or exhaustive. It is exhaustive "if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined", and thus is equivalent to "mean and include" (per Lord Watson, at 106). So a "scheme" had to fall within one of the terms specified in section 611(2) for section 611(1) to apply to it.

Mr Peacock argued in the alternative that even if the definition of "scheme" in s 611(2) was non-exhaustive, the decision to make the Payments would not constitute a "scheme" in the ordinary sense of that word.

With respect to the elements of the definition of the term "scheme" in s 611(2), Mr Peacock submitted that there was no "deed", nor an "agreement", nor a "series of agreements", as the Payments were a unilateral act made by the Group, and there was never a bilateral agreement between the Pensioners and the Group that such payments be made. With regard to the phrase "other arrangements providing for relevant benefits", Mr Peacock made the following four submissions:-

(1) The draftsman had deliberately chosen the plural, in contrast to "deed" or "agreement" which are the singular, so that the legislation excludes an arrangement in the singular, as opposed to multiple, continuing arrangements.

(2) The phrase "providing for" relevant benefits implied a continuing plan, and that if the draftsman had intended to refer to one-off payments of benefits, he would have referred to "arrangements under which relevant benefits are or may be provided".

(3) Construing the term "arrangements" by reference to the previous parts of the statutory phrase, the term is intended to cover bilateral relationships other than those referred to already, specifically those that fall short of a deed or a legal agreement.

(4) The ordinary meaning of the term "arrangements" was a bilateral agreement. Mr Peacock relied on British Basic Slag Agreement [1963] 2 All ER 807, a case on arrangements between steel manufacturers that were caught by s 6 of the Restrictive Trade Practices Act 1956. Section 6(1) of the Act referred to "any agreement between two or more persons carrying on business", and s 6(3) defined "agreement" as including "any agreement or arrangement, whether or not it is intended to be enforceable." The judge at first instance, Cross J, held that "all that is required to constitute an arrangement not enforceable in law is that the parties to it shall have communicated with one another in some way and that as a result of that communication each has intentionally aroused in the other an expectation that he will act in a certain way" (cited with approval by Willmer LJ in the Court of Appeal, at 813e). Willmer LJ said that the fact that the term "arrangement" had not been defined meant that "it was intended that the word should be construed in the ordinary or popular sense" (at 814b), and cited with approval Upjohn J's remark in Austin Motor Co, Ltd's Agreements, Re [1957] 3 All ER 62, that "an arrangement must at least connote an arrangement whereby the parties to it accept mutual rights and obligations" (at 69, cited at [1963] 2 All ER 807 at 813g, 814d).

Mr Peacock also relied on Scottish and Universal Newspapers Ltd v Fisher (Inspector of Taxes) [1996] STC (SCD) 311, a case concerning, inter alia, the meaning of the word "arrangements" in s 410(1)(b)(ii) ICTA, where the Special Commissioners said that "'arrangements' is a wide expression which will often mean something less than a legally binding contract. Perhaps the normal example will be a non-binding agreement made subject to contract" (paragraph 316).

The final case on which Mr Peacock relied concerning the meaning of "arrangements" is Allum v Marsh [2005] STC (SCD) 191, a case directly on s 596A ICTA. In that case the Revenue alleged that voluntary payments made by a company to the appellants Mr and Mrs Allum were either taxable as emoluments or as benefits under a non-approved retirement benefits scheme, and were not made on the termination of their employment. The Special Commissioner (Dr Brice) held that the payments were emoluments, but considered whether they were taxable under s 596A ICTA. In finding that they were not taxable under that section, the Special Commissioner said at paragraph 74:

"I find as a fact that there was no scheme or arrangement that these payments should be made. The matter was not been [sic] previously discussed with either appellant and they were both surprised and gratified when the company decided to make the payments. There was no expectation of reward."

The Special Commissioner found that this was not inconsistent with the Revenue's statement of practice 13/91, which provides at paragraphs 2 to 3:

"2. An ex gratia payment is made under a retirement benefits scheme if the decision to make the payment involves an arrangement. Self-evidently there will be an "arrangement" if the payment flows from any prior formal or informal understanding with the employee. But the term "arrangement" in this context goes wider and includes any system, plan, pattern or policy connected with the payment of a gratuity. Some examples are—

(a) a decision at a meeting to make an ex gratia payment on an employee's retirement; or

(b) where, say, a personnel manager makes an ex gratia payment under a delegated authority or on the basis of some outline structure or policy; or

(c) where it is a common practice for an employee to make an ex gratia payment to a particular class of employee.

3. There may be some exceptional situations where a gratuity is not paid under an "arrangement". The position in individual cases can be determined only on their facts."

After stating that the Statement of Practice was not legally binding, the Special Commissioner said (at paragraph 76):

"[A] finding that the voluntary payments in this appeal were not made under a retirement benefits scheme would not be inconsistent with the statement. I find as a fact that in this appeal there was no prior formal or informal understanding with the appellants that the payments would be made. There was no expectation of reward. The appellants were both surprised and gratified when the company decided to make the payments. I also find that there was no system, plan, pattern or policy connected with the payments. In my view the facts in this appeal bring the payments within para 3 of the statement and, in these exceptional circumstances, the gratuities were not paid under any arrangement."

The Special Commissioner did not hold that SP 13/91 was wrong in law. SP 13/91 effectively provides that there will be an arrangement for the purposes of a retirement benefits scheme not only where there is an arrangement between the employer and the employee but also where there is an arrangement, i.e. a "system, plan, pattern or policy" devised by the employer in isolation. The Special Commissioner cited the words "system, plan, pattern or policy" from paragraph 2 of SP 13/91, but did not cite the example given in paragraph 2(a), which indicates that the Revenue's view is that a mere decision made at a meeting to make an ex gratia payment on an employee's retirement would constitute an "arrangement" for the purposes of the legislation.

Mr Peacock submitted that there was no "scheme" for the purposes of s 596A because there was no provision of "relevant benefits": the terms "gratuity" and "other like benefit" take their colour from the terms "pensions and lump sums" and does not extent to one-off payments.

Furthermore, Mr Peacock submitted that the Payments were not "in connection with past service". This was because (1) the common feature of the recipients of the Payments was that they were entitled to use the tax service available to them prior to the decision to withdraw it in 1997; (2) the sums paid were calculated according to factors (age, usage of service, complexity of tax affairs), which were completely unrelated to the length of the recipients' service for the Group and the value attached to that service by the Group; (3) the Payments were not "in connection with" that is, causally connected to, the previous employment of the Pensioners but rather the termination of the tax service. In relation to (3), Mr Peacock relied on Wilcock v Eve.

Wilcock v Eve [1995] STC 18 concerned an employee of a company who joined a group company scheme entitling him to the right to acquire shares in that company if he was still employed by the group five years after joining the scheme. As a result of a management buy-out of his employer, the employee's employment ceased within the five year period and his rights under the scheme lapsed. The company that had previously wholly owned his employer company made an ex gratia payment to him of £10,000 because it wished to maintain its reputation for fairness. The Revenue argued that the payment was made to compensate the employee for his loss of rights under the share option scheme, which had been granted to him because of his employment, and would thus have been taxable under s 19 ICTA. The General Commissioners held that there was no relevant connection between the payments and the employee's employment, and that the payment was connected only with the loss of share option rights. The High Court upheld this decision, on the basis that the value of the grant of a right to a share option was capable of being a taxable emolument but that the value realized on its exercise was not so capable. The payment was made in compensation for the loss of the benefit which would have been realized on the exercise of the option, not on its grant. Carnwath J held that since the payment was made for the loss of a benefit which was not taxable, "for tax purposes it should have the same character as that for which it was being given" (28d).

Wilcock concerned the construction of the phrases "therefrom" and "by reason of" in s 19 ICTA and held that a causal requirement is necessary for those terms to apply, and that there was no significant difference between them (at 30c-d). Furthermore, in that case, in distinguishing between emoluments from employment, and rights from another source, Carnwath J said, "[one] sees the essential contrast between rights intimately linked with employment and rights enjoyed in some other capacity" (26a), and later that the former are "intimately connected with the employment" (at 27d). Mr Peacock submitted that the fact that Carnwath J used the phrase "connected with" in order to illuminate the phrases "therefrom" and "by reason of" indicated that the phrase "in connection with" in s 612(1) ICTA imported a direct causal link between payments and past service, a link which was lacking in this instance, as the payments were calculated according to criteria utterly unrelated to the past service of the Pensioners.

Mr Peacock further submitted that the Court of Appeal decision Hamblett v Godfrey [1987] STC 60 was only explicable on the basis that the phrase "in connection with" requires a causal link. In that case, the employer had withdrawn the trade union rights of its employees and made payments in compensation for that withdrawal. The question was whether the payments were emoluments "from" the employment. It was not the phrase "in connection with" that was being interpreted. However, in the Court of Appeal, Purchas LJ said that the rights to join trade unions were "directly connected with the fact of the taxpayer's employment. If the employment did not exist, there would be no need for the rights in the particular context in which the taxpayer found herself" (at 69). Mr Peacock submitted that this demonstrated again that the phrase "in connection with" imported a direct causal link.

Mr Peacock said that although the Payments were connected with the provision of tax services, which were in turn connected with past service of the Pensioners, it did not follow that the Payments were connected with past service. This relied, he submitted, on the false inference from "A is connected with B" and "B is connected with C" to "A is connected with C".

Finally, Mr Peacock said that a payment made in lieu of another payment or benefit takes its status for tax purposes from the benefit it replaces (a "substitution principle"). Mr Peacock relied on Wilcock v Eve [1995] STC 18, Falkirk Ice Rink v IRC [1975] STC 434 and Mairs v Haughey [1992] STC 495.

Falkirk Ice Rink v IRC [1975] STC 434 concerned a company that owned and operated an ice rink, and provided facilities for curling to the public on the payment of certain charges. The charges were not sufficient to cover the cost of providing the facilities. A club of ice rink users was anxious to ensure the continuation of the service and donated £1,500 to the company to cover the additional cost of curling for the season 1968-9. The company was assessed on the sum as a trading receipt. It appealed on the basis that it was a gift made to the company. The Court of Session held that the fact that it was a gift was neutral with regard to whether it was a trading receipt, and held that "in substance and in form it was a payment made to a trading company artificially to supplement its trading revenue from curling and in order, in the interests of the club and its members, to preserve the taxpayer company's ability to continue to provide curling services in future" (per Lord President (Emslie), at 441). The payment had been made in lieu of trading receipts, and would therefore be taxed as such.

Mr Peacock sought further support from Mairs v Haughey [1993] STC 569. In that case an ex gratia payment was made to an employee in consideration of the employee giving up contingent rights to non-statutory redundancy payments, which the Revenue accepted would not have been taxable as an emolument (577d-g). Lord Woolf said at (577j and 580j):

"I do not understand the policy reasons for treating a payment genuinely made in lieu of receiving a redundancy payment in a different way from an actual redundancy payment. It is inevitable that if a payment is made in substitution for a payment, which might, subject to a contingency, have been payable that the nature of the payment which is made in lieu will be affected by the nature of the payment which might otherwise have been made. There will usually be no legitimate reason for treating the two payments in a different way.

As already indicated, the payment made to satisfy a contingent right to a payment derives its character from the nature of the payment which it replaces. A redundancy payment would not be an emolument from the employment and a lump sum paid in lieu of the right to receive the redundancy payment is also not chargeable as an emolument under Sch E."