HM Inspector of Taxes v Clayton

This appeal by the Crown relates to the correct treatment for tax purposes of a sum of £5,060 which the Respondent, Stephen Clayton, received from his employer, Birmingham City Council (“the Council”), pursuant to a consent order dated 12 July 2000 and made by an Employment Tribunal (“ET”) sitting in Birmingham.

Mr. Clayton prior to 1997 was one of a number of employees of the Council who under their contracts of employment were entitled to receive a benefit known as an Essential Car User Allowance (“ECUA”). This is a payment made to the employee for having to use his car at work in the normal execution of his duties.

In 1997 the Council, wishing to make savings in its budget, reviewed ECUA which it decided to scrap for employees doing less than 3,000 miles a year. Toward the end of 1997 the Council wrote to employees affected by the decision, asking for formal agreement to the removal of ECUA. Mr. Clayton was one such employee. The employees were warned that if such agreement was not forthcoming, their employment contracts would be terminated and new contracts offered which would be identical to their old contracts save that they would only receive ECUA if they drove more than 3,000 miles a year.

Mr. Clayton did not give his agreement. Accordingly, his contract of employment was terminated, but he was immediately re-employed on the new terms and conditions which left him no longer entitled to ECUA. 126 employees of the Council including Mr. Clayton commenced proceedings in the ET against the Council for unfair dismissal. Further, two trade unions, UNISON and UCATT, brought proceedings against the Council for breach of its duty under s. 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 to consult representatives of the employees amongst whom the employer is proposing to make large-scale redundancies.

The cases of two employees were selected as test cases and heard by the ET. The unions’ applications were also heard at the same time. On 3 March 2000 the ET held that the employees had been unfairly dismissed. It also held that the Council did breach its duty under s. 188. The decision of the ET was expressed in terms strongly critical of the Council. A remedies hearing was then fixed for all the employees who had brought proceedings and for the two unions. However, agreement was reached between the parties without a contested hearing and its terms embodied in the order made by the ET on 12 July 2000.

Para. 1 of the order was in this form:

“Reinstatement

1.

It is ordered by consent that [a] the [Council] will reinstate pursuant to S114 Employment Rights Act 1996 all the Applicants …. within 28 days with their right to ECUA restored.

[b] the [Council] will calculate and pay to “the Applicants” Basic Awards pursuant to S119 Employment Rights Act 1996 within 28 days.

[c] the [Council] will calculate and pay to “the Applicants” pursuant to S114(2)(a) …. remuneration lost in respect of ECUA between their dates of termination and dates of reinstatement.”

Para. 3 gave liberty to any of the employees of the Council to apply to the ET for exact adjudication of any of their claims under s. 114 or s. 119 if not agreed. Para. 2 contained a consent order for the Council to pay to UNISON £1,125,000 on its s. 188 claim. No reference was made to UCATT’s s. 188 claim.

Mr. Clayton submitted to the Inspector of Taxes a self-assessment for the fiscal year ended 5 April 2001. It appears that the £5,060 payment was made in that year but was not treated by Mr. Clayton as taxable, because the Inspector of Taxes amended the self-assessment to include that payment.

Mr. Clayton appealed to the General Commissioners against that amendment. In the Case Stated requested by the Crown after the appeal was allowed they made no findings of fact as to how the parties to the order of 12 July 2000 came to give their consent. They merely recorded the result of the liability hearing, the fact of the consent order at the remedy hearing, the fact that Mr. Clayton was reinstated and his right to ECUA restored and the fact of the payment of £5,060 pursuant to para. 1(b) of the Order. The primary focus of the Crown’s case at the hearing before the General Commissioners was on the chargeability of the payment as an emolument within s. 19 of the Income and Corporation Taxes Act 1988 (“ICTA”). In the alternative the Crown claimed that the payment was chargeable under s. 154 of the ICTA as a benefit provided to Mr. Clayton at the cost of his employer. We are told that there was no investigation before the General Commissioners of the circumstances of the making of the consent order or of the consideration moving from Mr. Clayton for the payment of £5,060.

The General Commissioners allowed the appeal. They expressed their decision briefly in para. 9 of the Case Stated in this way:

“(a)

[Mr. Clayton’s] employment had been terminated and the payment awarded by the Employment Tribunal to [Mr. Clayton] on 12 July 2000 was received in connection with that termination under section 119 [Employment Rights Act] 1996.

(b)

Although the payment fell within the provisions of section 148 ICTA 1988 as a payment not otherwise chargeable to tax received in connection with the termination of a person’s employment, it was not chargeable to tax under that section as it did not exceed £30,000.

(c)

Accordingly, [Mr. Clayton’s] appeal against the Revenue amendment to his self-assessment is allowed and we confirm his self-assessment in the amount initially made.”

The Crown appealed to the High Court. The appeal was heard by Patten J. It was argued for the Crown that the payment could not be and therefore was not a payment of compensation for unfair dismissal because the ET had no jurisdiction to make such an order in addition to an order for reinstatement, and the order for reinstatement had the effect of requiring the taxpayer to be treated throughout as if he had not been dismissed; the payment was therefore referable to his employment and was taxable either under s. 19 or s. 154. The judge rejected both alternatives, holding that the payment fell within s. 148 ICTA as not otherwise chargeable to tax and as received in connection with the termination of Mr. Clayton’s employment and in consequence of that termination. As the payment did not exceed £30,000, the result was that the £5,060 payment was not chargeable to tax under s. 148. Accordingly, the judge dismissed the appeal.

The Crown applied to this court for permission for this second appeal and such permission was granted by Carnwath L.J. on the papers.

At this point it is convenient to refer to the statutory provisions in the Employment Rights Act 1996 (“ERA”) and in ICTA respectively which are relevant to this appeal.

Part X of ERA gives an employee the right not to be unfairly dismissed (s. 94(1)), the right to bring a complaint of a breach of that right before an ET (s. 111) and the right, if that complaint is upheld, to the remedies provided for in Ch. II of Part X. By s. 111(2) and (3) the successful complainant is given the right to ask for an order for reinstatement or re-engagement under s. 113 and, if so, the ET may make such order. But by s. 112(4), “If no order is made under section 113, the tribunal shall make an award of compensation for unfair dismissal (calculated in accordance with sections 118 to 127A) to be paid by the employer to the employee.”

S. 114 provides for the order for reinstatement in the following terms (so far as material):

“(1)

An order for reinstatement is an order that the employer shall treat the complainant in all respects as if he had not been dismissed.

(2)

On making an order for reinstatement the tribunal shall specify -

(a)

any amount payable by the employer in respect of any benefit which the complainant might reasonably be expected to have had but for the dismissal (including arrears of pay) for the period between the date of termination of employment and the date of reinstatement,

(b)

any rights and privileges (including seniority and pension rights) which must be restored to the employee, and

(c)

the date by which the order must be complied with.”

When an order is made under s. 113 but the complainant is not reinstated or re-engaged in accordance with the order, the ET must award compensation (s. 117(3)).

The compensation which is provided for by s. 112(4) is in two parts: the basic award and the compensatory award (s. 118(1)). The basic award is calculated in accordance with the mandatory provisions of s. 119 by reference to the period of employment ending with the effective date of termination. The compensatory award is of such amount as the ET considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal insofar as that loss is attributable to action taken by the employer (s. 123 (1)). It is unnecessary to refer to the further provisions governing the basic award and the compensatory award.

I should also refer to s. 203 which provides (so far as material):

“203 Restrictions on contracting out

(1)

Any provision in an agreement (whether a contract of employment or not) is void in so far as it purports –

(a)

to exclude or limit the operation of any provision of this Act, or

(b)

to preclude a person from bringing any proceedings under this Act before an employment tribunal.

(2)

Subsection (1) - ….

(e)

does not apply to any agreement to refrain from instituting or continuing proceedings where a conciliation officer has taken action under section 18 of the Employment Tribunals Act 1996, and

(f)

does not apply to any agreement to refrain from instituting or continuing . . . any proceedings within section 18(1)(d) (proceedings under this Act where conciliation available) of the Employment Tribunals Act 1996 if the conditions regulating compromise agreements under this Act are satisfied in relation to the agreement.

(3)

For the purposes of subsection (2)(f) the conditions regulating compromise agreements under this Act are that –

(a)

the agreement must be in writing,

(b)

the agreement must relate to the particular proceedings,

(c)

the employee or worker must have received [advice from a relevant independent adviser] as to the terms and effect of the proposed agreement and, in particular, its effect on his ability to pursue his rights before an employment tribunal,

(d)

there must be in force, when the adviser gives the advice, a contract of insurance, or an indemnity provided for members of a profession or professional body, covering the risk of a claim by the employee or worker in respect of loss arising in consequence of the advice,

(e)

the agreement must identify the adviser, and

(f)

the agreement must state that the conditions regulating compromise agreements under this Act are satisfied.”

S. 19 relates to tax chargeable under Sch. E, and is in this form (so far as material):

“19 Schedule E

(1)

The Schedule referred to as Schedule E is as follows: -

SCHEDULE E

1.

Tax under this schedule shall be charged in respect of any office or employment on emoluments therefrom which fall under one or more than one of the following Cases –

Case I: any emoluments for any year of assessment in which the person holding the office or employment is resident and ordinarily resident in the United Kingdom ….”

The term “emoluments” is given an extended meaning by s. 131(1) to include “all salaries, fees, wages, perquisites and profits whatsoever”.

S. 148 (so far as relevant) is in this form:

“148 Payments and other benefits in connection with termination of employment, etc

(1)

Payments and other benefits not otherwise chargeable to tax which are received in connection with –

(a)

the termination of a person’s employment, or

(b)

any change in the duties of or emoluments from a person’s employment,

are chargeable to tax under this section if and to the extent that their amount exceeds £30,000.

(2)

For the purposes of this section “benefit” includes anything which, disregarding any exemption –

(a)

would be an emolument of the employment, or

(b)

would be chargeable to tax as an emolument of the employment.

….

(5)

This section applies –

(a)

whether the payment or other benefit is provided by the employer or former employer or another person, and

(b)

whether or not the payment or other benefit is provided in pursuance of a legal obligation.

(6)

This section has effect subject to Schedule 11, which contains provisions extending, restricting and otherwise supplementing the provisions of this section.”

Para. 2 (1) of Sch. 11 provides (so far as material):

“Section 148 applies to all payments and other benefits received directly or indirectly in consideration or in consequence of, or otherwise in connection with, the termination or change –

(a)

by the employee or former employee ….”

Ch. II of Part V of ICTA contains in ss. 153 – 168 supplementary charging provisions. S. 154 is in this form (so far as material):

“154 General charging provision

(1)

Subject to section 163, where in any year a person is employed in employment to which this chapter applies and –

(a)

by reason of his employment there is provided for him …. any benefit to which this section applies; and

(b)

the cost of providing the benefit is not (apart from this section) chargeable to tax as his income,

there is to be treated as emoluments of the employment, and accordingly chargeable to income tax under Schedule E, an amount equal to whatever is the cash equivalent of the benefit.

(2)

The benefits to which this section applies are accommodation (other than living accommodation), entertainment, domestic or other services, and other benefits and facilities of whatsoever nature (whether or not similar to any of those mentioned above in this subsection) ….”

By s. 156 (1) the cash equivalent of any benefit chargeable to tax under s. 154 is an amount equal to the cost of the benefit, less so much (if any) of it as is made good by the employee to those providing the benefit.

S. 168 contains provisions for the interpretation of, among other sections in Ch. II, s. 154. By s. 168(2) employment means an office or employment the emoluments of which fall to be assessed under Sch. E. By s. 168 (3) (so far as material):

“(3)

For the purposes of this Chapter –

(a)

all sums paid to an employee by his employer in respect of expenses, and

(b)

all such provision as is mentioned in this Chapter which is made for an employee …. by his employer,

are deemed to be paid to or made for him or them by reason of his employment ….”

On this appeal Mr. Adam Tolley for the Crown asks that the appeal be allowed because:

(1)

the payment of £5,060 is taxable as a benefit pursuant to s. 154;

(2)

alternatively, the payment is taxable as an emolument from Mr. Clayton’s employment pursuant to s. 19;

(3)

the payment is not a payment in connection with, or in consequence of, the termination of Mr. Clayton’s employment for the purposes of s. 148.

I will consider these submissions in what seems to me to be the logical order of looking at s. 19 first, then s. 154 and finally s. 148.

At the outset of his submissions Mr. Tolley took a point which he had not taken before the judge, which had not been taken before the General Commissioners and which was not heralded in his skeleton argument in this court. It was that the compromise agreement between the Council and the employees evidenced in the consent order was void for non-compliance with s. 203 ERA and accordingly there was no bargain under which the employees gave up any rights of any value or otherwise provided consideration to the Council for the payments payable to them under para. 1 (b) of the order.

I have grave doubts as to whether the Crown should be permitted to advance a new argument in this court which is in part dependent on unexplored facts. The premise of the argument is that the agreement is not excepted from s. 203 by any of the prescribed exceptions, for example by the involvement of a conciliation officer under s. 203(1)(e). Whilst there is no evidence before us that a conciliation officer was involved, there is equally no evidence that there was no such involvement. It is unfortunate that the Crown did not take the point before the General Commissioners, so that any factual points could be resolved by the tribunal of fact.

I also have doubts in any event as to whether s. 203 does apply to a situation such as we have here. It is far from obvious that, where employees and their employer reach a compromise on the form of relief to which the employees are entitled consequent on the determination of their unfair dismissal claims in their favour, and embody it in a consent order made by the ET, they are purporting to preclude the employees from bringing any proceedings under the Act before an ET. Mr. Tolley relies on s. 203(1)(b) on the footing that the compromise agreement in the consent order purported to preclude the employees from bringing proceedings before the ET. He has drawn our attention to two EAT cases on the provision in the Trade Union and Labour Relations Act 1974 which was an earlier predecessor of s. 203. It was said in those cases, Council of Engineering Institution v Maddison [1977] ICR 30 and Naqvi v Stephens Jewellers Ltd. [1978] ICR 631 (in the earlier case obiter and in the latter as a matter of decision), that “bringing any proceedings” included continuing proceedings already brought. However, the statutory provision then under consideration was “presenting a complaint to or bringing any proceedings before an industrial tribunal”, and other provisions of s. 203 are not identical to what appear in the earlier legislation. Mr. Tolley drew our attention to another EAT decision, Carter v Reiner Moritz Associates Ltd. [1997] ICR 881, in which it was held that where the ET has made a finding of unfair dismissal, the parties may agree on compensation subject to the order being made by the ET. Here, he submits, the ET had no jurisdiction to order compensation in addition to reinstatement. He makes a similar point to distinguish yet another EAT decision, Times Newspapers Ltd. v Fitt [1981] ICR 637, in which it was held that a compromise entered into by solicitors for a party without authority when the case was disposed of by the ET was not rendered void by the statutory equivalent of s. 203.

I do not intend in this appeal to resolve the doubts which I have expressed, as it is, in my view, unnecessary to do so. We are concerned with the question of the chargeability to tax of the payment of £5,060, which undoubtedly was made pursuant to the consent order, whether or not the compromise agreement was void and despite the ET’s lack of jurisdiction to make an order for compensation in addition to an order for reinstatement.

For the submission that the payment is chargeable under s. 19 Mr. Tolley relies on s. 114 (1), requiring, as it does, that the Council treat Mr. Clayton in all respects as if he had not been dismissed. He says that an important practical effect of the order for reinstatement is that the employee must be treated as if he had unbroken continuity of service, and he points to para. 3 of The Employment Protection (Continuity of Employment) Regulations 1996, providing as it does for the preservation of the employee’s continuity of employment. He says that the court should treat the payment as one directly connected with the fact of Mr. Clayton’s continued employment and as referable thereto. He suggests that it is artificial and technical to treat Mr. Clayton as having his employment terminated when the reality is that the employment did not terminate but continued unaffected. He describes the payment as a gratuity paid to Mr. Clayton for being an employee, and as such he argues that the payment comes within the extended meaning of emoluments provided for in s. 131 (1).

I am not able to accept these submissions. The cornerstone of Mr. Tolley’s argument is s. 114 (1), the effect of which he would have override all other circumstances. But s. 114 (1) is only worded as a direction to the employer to treat the complainant in all respects as if he had not been dismissed. I do not see that its effect is to override the actual facts relating to a payment when the court is considering for tax purposes whether that payment in the hands of the recipient employee should be taxed. The direction to the employer does not touch that question, nor do the 1996 Regulations. S. 219 ERA allows provision to be made by regulations for the limited purposes of Ch. I of Part XIV, that Chapter being directed only to the calculation of periods of continuous employment.

The fact is that the payment was made by the Council to Mr. Clayton pursuant to para. 1 (b) of the consent order which expressly referred to the payment to be made as the basic award pursuant to s. 119 ERA. The calculation of the basic award depended on there being an effective date of termination. Indeed the entire proceedings were based on the claim, upheld by the ET at the liability hearing, that the employees had been unfairly dismissed. Nor is it artificial to treat the dismissal as having occurred. The Council, in the absence of the agreement of the employees, could not change the terms of employment so as to take away their contractual right to ECUA. That is why the Council terminated their contracts of employment and offered new contracts which did not contain that right.

The fact that the Council, the employees and the ET appear to have overlooked or ignored s. 112 (4) ERA and that there was no jurisdiction for the ET to make an order pursuant to s. 119 at the same time as making the order for reinstatement pursuant to s. 114 does not alter the fact that the consent order was made on the footing that s. 119 applied. We do not know how the underlying agreement was reached, but on its face the consent order appears to be a compromise embracing not only the employees’ claims for relief but also UNISON’s substantial claim for relief against the Council. The consent order was a global package. There is nothing to suggest that this was not a true bargain reached between the parties. The employees, who had their new contracts, need not have gone for an order for reinstatement but could have sought compensation for losing ECUA for the future as well as for the past in addition to the basic award. The Council, after the criticisms made of it in the decision on liability, may well have wanted to avoid a further contested hearing with further costs incurred by it and the risk of an adverse costs order if its conduct of the proceedings appeared unreasonable to the ET. Having embarked on the review of ECUA to save money, the Council is not likely to have intended to present the employees or UNISON with a gratuitous benefit. I cannot accept Mr. Tolley’s suggestion that the payments to the employees were gratuities.

Mr. Tolley pointed to an inconsistency in the judge's language in his judgment in that in para. 7 he stated that the payment was "on any view a bonus", in para. 9 that it was "a purely voluntary one" but in para. 27 that it was "not .… a voluntary payment". However, if those comments are read in the context in which they appear, there is no real inconsistency. In para. 7 his comment about a bonus followed a reference to the orders for re-instatement and for restoring the ECUA and was plainly directed only to the fact that para. 1(b) was additional to those orders; it was not directed to whether the payment so ordered was a gratuity. His description in para.9 of the payment as a purely voluntary one is explained in his next sentence, viz. that it was not a payment which the ET had jurisdiction to order the Council to make, nor was it made as a term of a revised contract of employment pursuant to the order for reinstatement. Further, in the sentence after that the judge expressly refers to the contractual basis of the payment as agreed between the Council and the taxpayer in the context of a finding of unfair dismissal and an order for an adjourned remedy hearing. In para. 27 the judge expressly recognises that the payment resulted from arm’s length negotiations to settle the dispute.

The judge recognised that to be taxable under s.19, the payment need not be made as a term of the contract of employment and that voluntary payments are included within the charge if made by way of payment for services. He looked for evidence of the necessary causal link between the payment made and the services rendered, pointing out that the mere fact that the payment was made by the employer to the employee was not sufficient. He referred to several authorities including Hochstrasser v Mayes [1960] AC 376 at pp. 391-2 where Lord Radcliffe stressed the requirement that the payment must arise from the office or employment and said of the statutory words:

“For my part, I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee.”

The judge also referred to the remarks of Lord Templeman in Shilton v Wilmshurst [1991] 1 AC 684 at page 689 to the effect that an emolument from employment means an emolument from being or becoming an employee. Lord Templeman said:

“If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, then the emolument is not received ‘from the employment’”.

Patten J. said at para. 15 of his judgment:

“If one applies these tests to the present case, they are not satisfied. There is no finding and no evidence that the taxpayer received the payment under paragraph 1(b) of the order as a reward for services or as an inducement to future performance. He had already been re-employed some years earlier and had been compensated for loss of the car allowance by the s.114 order for reinstatement. Although the payment was not a gift as such, neither was it a profit from the employment. It resulted from a negotiated settlement of the dispute and was the direct consequence of the earlier dismissal and the Tribunal's determination that this had been unfair. The fact that the Tribunal had no jurisdiction to order it to be made under s.119 ERA 1996 does not rob it of that status as a matter of agreement between the Council and the taxpayer in his capacity as a former employee. This was his only capacity relevant to the issue before the Tribunal which led to the order. His employment since 1997 is of no consequence other than in the formulation of the terms and scope of the s.114 order. It is in that context that the payment has to be judged.”

I agree with the judge. I ask myself the simple question: is the payment an emolument (within the extended meaning of s. 131(1)) from the employment? The answer I give unhesitatingly is that it is not. It is not enough that Mr. Clayton would not have received it but for having been an employee. It is not a payment in return or as a reward for past services. It is not a payment in return for acting as or being an employee. It is not a payment as an inducement to enter into employment – he already was employed – or to provide future services. If one looks for what reason it was paid, the answer is obvious from para. 1 (b) of the consent order: it was to compensate Mr. Clayton for the unfair dismissal. As it was paid, and paid by way of settlement of his claim, it is irrelevant that objection might have been taken to the agreement evidenced by the consent order or to the order itself. I conclude that the Crown’s argument based on s. 19 must be rejected.

Mr. Tolley submits in the alternative to s. 19 that s. 154 ICTA applies to bring the payment into the charge to tax as a benefit. He relies on s. 168 (3)(b) as deeming the benefit, which is the payment to him in a year in which he was employed, as paid by reason of his employment. Subject to one point, it is not in dispute that s. 154 applies.

That point is the exception, which Mr. Richard Jones Q.C. for Mr. Clayton submits and which the Crown accepted, is implicit in the wording of s. 154. It is the exception for what were called in Mairs v Haughey (1992) 66 TC 273 receipts from fair bargains. The dispute between the parties is as to the extent of and conditions for that exception.

In Mairs the employees of Harland & Wolff had the benefit of an enhanced redundancy scheme. On the privatisation of the employer, each employee was offered as a term of employment with a new employer a payment of 30% of the amount which the employee would have received under the redundancy scheme in return for the surrender of his rights under the scheme. All the employees accepted the offer and the payments were made. The Crown sought to tax the payments under s. 19 or s. 154. Mr. Haughey was one employee who received payment. He appealed to the Special Commissioner, and his appeal was heard by Mr. Brian O’Brien, who allowed the appeal, holding that the payment was not taxable under s. 19 or s. 154. It is only in relation to the appeal on the s. 154 point before the Special Commissioner and the Court of Appeal of Northern Ireland that the case is relevant. Although the case went to the House of Lords, it did so on another point not material to this appeal.

The Special Commissioner said that the 30% offer did not have as its basis a genuine valuation of the employees’ rights under the redundancy scheme, but he found that the offer did not overvalue those rights. The relevant part of his decision was cited in the leading judgment of Sir Brian Hutton L.C.J at p. 314. There the Lord Chief Justice was answering what he called the third question, which was whether the receipt of the cash payment by Mr. Haughey constituted a benefit within the meaning of s. 154, having regard to the fact that he received the benefit in return for surrendering his contingent right to receive payment under the redundancy scheme. The Lord Chief Justice said:

“The third question was answered by the Special Commissioner in the negative in favour of the Respondent. He stated, at page 17B of his decision.

“The consequences of adopting the Crown’s approach are, to my mind, so appalling that something must be wrong. The situation has been created by the ‘cash benefit’ decision in Wicks v Firth [[1982] Ch 355]: if that was wrong, cadit quaestio. But on the assumption that it is right, it seems to me that Parliament must have intended Mr. Park’s approach to ‘benefits’ to be right also. Section 154 brings benefits into charge. All kinds of benefits are covered: but whatever they are, they must still be capable of being described as ‘benefits’. The legislation is aimed at profits (in a broad sense) which escape taxation under the mainstream Sch E provisions for one reason or another. It is not aimed at receipts resulting from fair bargains.

The bargain in the present case had, as its constituents, more than just the surrender of rights against a money payment. It would not be realistic to ignore another factor: the offer of continued employment. But at the end of the day I do not think that matters. I would adopt the words of Viscount Simonds in Hochstrasser [v] Mayes [[1960] AC at p. 390]:

“Nor, if it became relevant, should I in the present case feel equal to the task of weighing the benefit or detriment enjoyed by the one side or the other. It was a bargain, and as good bargains should be, thought by each side to be worth while. I have the highest authority for my course if I leave it there and “reject the lore of nicely calculated less or more”.

In my judgment, the payments made to Mr. Haughey were not chargeable under s. 154.”

In my opinion, the decision of the Special Commissioner on this point was correct. The Respondent received the payment of £4,506 in return for surrendering his contingent right to receive a payment under the enhanced redundancy scheme, and the Special Commissioner held, at page 4D of his decision, that the payment did not overvalue that right. Therefore, I consider that the Respondent did not receive a “benefit” within the meaning of s. 154 where the money received was paid to him, by way of fair valuation, in consideration of his surrender of a right to receive a larger sum in the event of the contingency of redundancy occurring.”

McDermott L.J. said at p. 325 that he agreed in respect of the s.154 claim. He expressed himself at p. 326 as satisfied that Mr. Haughey’s right under the redundancy scheme was at least worth what he received and that no benefit remained to be taxed, and he cited with approval the last 4 sentences in the first paragraph which the Lord Chief Justice cited from the Special Commissioner's decision.

The third member of the Northern Ireland Court of Appeal, Nicholson J. agreed at p.334 with the Special Commissioner that s. 154 is not aimed at receipts resulting from fair bargains, and said that in view of the finding that Mr. Haughey surrendered a right which was worth at least the amount of the payment which he received, it could not be said that he was paid a benefit within s. 154.

Patten J., when rejecting an argument that a benefit was conferred on Mr Clayton by the Council through the payment of £5,060, relied on what the Lord Chief Justice said in Mairs. He said in para. 27 of his judgment:

“Mr Tolley accepted that a fair bargain case did not fall within s.154, but sought to distinguish Mairs v. Haughey from the facts of the present case on the basis that no rights were being surrendered and that the payment made was not compensation under s.119. But that is too narrow a view. The essence of Hutton LJ's reasoning was that a payment made under an arm's length bargain was not the payment of a benefit in kind. Although the payment in this case could not have been made under s.119, that does not make it a voluntary payment. It clearly resulted from arm's length negotiations to settle the dispute following the finding that there had been unfair dismissal. The fact that the taxpayer and the other employees did rather better than they would have done in a contested remedy hearing makes no difference unless it can be shown that the payment in question was purely gratuitous. There is no evidence to support that conclusion.”

Mr. Tolley criticises the judge's reasoning on this point. He submits that the judge has impermissibly reinterpreted the Lord Chief Justice's reasoning which relied on the finding that the payment to Mr. Haughey did not overvalue the right being surrendered and on the fact that the money was being paid to Mr. Haughey "by way of a fair valuation". He says that it is not enough that the payment was made under an arm's length bargain or resulted from arm's length negotiations unless the employee, in return for the benefit conferred provided consideration which was broadly equivalent in value to the benefit conferred. In particular, he says that it was not enough that the parties to the consent order may have thought that they were entering into a proper bargain when in reality the employees had no right to receive compensation in addition to an order for reinstatement and when "intrinsically" their right had no value.

The difficulty with that approach is that the Lord Chief Justice plainly cited with approval what the Special Commissioner had said, including his quotation from Viscount Simonds’ speech. Otherwise he would have excluded that part of the Special Commissioner's reasoning from his citation. In my judgment, the Lord Chief Justice did approve that reasoning, even though he went on to say on the particular facts of Mairs that, having regard to the Special Commissioner's finding on the value of the surrendered right, there was no benefit paid to Mr. Haughey. As I have noted, McDermott L.J. agreed with the Lord Chief Justice. I do not accept that Mairs decided that for there to be no benefit, there must be a fair valuation of the consideration moving from the employee.

In the passage quoted from Hochstrasser Viscount Simonds makes clear that a bargain, thought by each side to be worthwhile, is sufficient. That was said in the context of a case where the employer, ICI, obliged many employees to be prepared to work wherever it required and had a housing scheme under which it compensated its employee for loss on the sale of his house when requiring him to move to another factory. The Crown sought to tax the employee on that compensation payment under the then equivalent of s. 19, arguing that it was a reward for services. It sought to fortify that argument by a close analysis of the benefit or detriment accruing to or suffered by the employee and to conclude that no substantial consideration for the payment moved from the employee. Viscount Simonds doubted whether it was relevant to ask what, if any, consideration moved from the employee and whether it was substantial or sufficient. He then continued with the passage cited by the Special Commissioner and quoted in para. 43 above.

In the light of the approval of the Northern Ireland Court of Appeal of the application by the Special Commissioner of the words of Viscount Simonds in the context of s. 154, I would adopt the same approach. Whilst this court is not bound to follow that Court of Appeal, it is well-established that in tax cases the greatest deference should be paid to the decisions of the courts of Northern Ireland and Scotland on tax legislation applicable there as well as in England and Wales (see Halsbury’s Laws 4^th ed. Vol. 37 (2001 Reissue) para. 1250 n. 1 and the cases therein cited.). Further it makes good sense. The justice of excluding from the scope of s. 154 a payment made by an employer to an employee pursuant to a fair bargain seems to me self-evident, and, as Clarke L.J. suggested in the course of the argument, it may explain why a payment made by the employer to an employee pursuant to an award of damages or to a settlement of a claim for such damages is, as the Crown accepts, not within s. 154. Where parties at arm’s length arrive at a genuine compromise in settlement of hostile litigation, it would be an extremely difficult task for any tribunal or court to unpick the constituent parts of the bargain and to put a value on those parts. For my part, I would not rule out the possibility that it might be shown in some cases that the reason for the payment was to confer a gratuitous benefit within a compromise agreement so that to that extent s. 154 might apply. But there is no suggestion that there was any such reason in the present case. Mr. Tolley’s submission that what the parties thought of their bargain was irrelevant seems to me plainly inconsistent with Viscount Simonds’ approach.

Accordingly, whilst I would not go so far as the judge did in para. 27 when he said that nothing short of showing that the payment was purely gratuitous would suffice, I agree with the judge’s conclusion that s. 154 is not satisfied in that it has not been shown that the payment was made otherwise than pursuant to a genuine compromise of the proceedings without any intention to give a gratuity to the employees; accordingly the payment was not a benefit within s. 154.

Mr. Tolley in his skeleton argument argued that even if he was wrong on s. 19 and s. 154, the payment did not fall within s. 148 because it was not made in connection with or in consequence of the termination of Mr. Clayton’s employment for the purposes of s. 148. However, in his oral argument he accepted that if he failed on s. 19 and s. 154, he could not succeed on s. 148. That was a correct concession. In my judgment, it is plain that the payment does fall within the sweeping-up provisions of s. 148 but that, not exceeding £30,000, it is free from tax.

For these reasons, despite Mr. Tolley’s well-sustained and ingenious arguments, I would dismiss this appeal.

I agree.

I also agree.