Kuehne & Ors v Revenue and Customs

This is an appeal in a test tax case. On 5 November 2008 Her Majesty’s Commissioners of Revenue and Customs (HMRC) decided that payments of £4,800 each made to employees on the occasion of the transfer of their employment from Scottish & Newcastle UK Limited (S&N) to Kuehne + Nagel Drinks Logistics Limited (KNDL) were liable to income tax and to National Insurance Contributions (NICs).

The payments were held by the tribunals below to be liable to tax as “earnings…from an employment” for the purposes of s. 9 of the Income Tax (Earnings and Pensions) Act 2003 (the 2003 Act). The payments were also liable to NICs as being “earnings …derived from an employment” for the purposes of s. 6 of the Social Security Contributions and Benefits Act 1992 (the 1992 Act). It is common ground on the appeal that the test to be applied for NICs is, in substance, the same as that under s.9 of the 2003 Act.

The employees to whom the payments were made include the appellants, Mr A Stott and Mr AC Joyce, who are only two of a large number of employees who “feel hard done by.” The majority of those affected belong to the union UNITE, which supports the appeal.

The appellants first appealed from the decision of HMRC to the First Tier Tribunal (the FTT), in which Judge Hellier dismissed their appeals on 17 December 2009. They then appealed to the Upper Tribunal (the UT), in which Newey J upheld the FTT decision in his judgment of 21 December 2010. Arden LJ granted them permission to appeal on 5 April 2011.

The issue in this appeal is whether the FTT erred in law in its construction or application of the 2003 Act and the 1992 Act to the facts it found. Judge Hellier made key findings of fact about the circumstances in which the payments were made to each employee. The focus of argument in this court is, as it was in the UT, on that first instance judgment.

In 2006 S&N and Kuehne + Nagel set up KNDL as a joint venture company for drinks distribution each having a 50% share. S&N transferred its drinks distribution business to KNDL along with 2000 employees. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) applied to the transfer.

The employees transferred were seriously concerned, because they considered that the KNDL pension scheme was not as generous as S&N’s defined benefit pension scheme and TUPE did not preserve their pension rights on the relevant transfer. Industrial action was considered and threatened in relation to the pensions position. Representatives of both sides met. Eventually S&N agreed to fund payments totalling £5,000 to each member of the S&N pension scheme who transferred to KNDL. The relevant sum for tax purposes is £4,800 after deduction of £200 as compensation for the loss of the beer allowance, which S&N employees had enjoyed, but which was not to be provided by KNDL. The few members who were not members of the pension scheme only received compensation for the lost beer allowance.

The payments were made in two tranches by KNDL on behalf of S&N, £3,000 in August 2006 and £2,000 in April 2007. The transfer went ahead smoothly.

It was common ground that the £200 for the beer allowance was taxable. The dispute was about the liability of the payments of £4,800 to tax.

The taxation of employment income is dealt with by s.9 of the 2003 Act which provides:-

For these purposes s. 62 (2) of the 2003 Act provides that “earnings” in relation to an employment means:-

Liability for NICs purposes is dealt with by ss.3 and 6 of the 1992 Act. Section 6(1) provides for such contributions to be payable where in any tax week earnings are paid to or for the benefit of an earner. Section 3(1) provides that:-

“earnings” includes any remuneration or profit derived from an employment; and

“earner” shall be construed accordingly.”

In the key concluding paragraphs in his judgment (paragraphs 103 and 104) Judge Hellier cited and applied a passage that summarised the conditions to be satisfied for a payment to be “from an employment”:-

That is a passage from the judgment of Upjohn J in Hochstrasser v. Mayes (1959) 38 TC 673 at 685. It was approved as accurate (save possibly for the reference to “past”) by Viscount Simonds on the appeal to the House of Lords at p. 705. It was cited approvingly by Lord Reid in Laidler v. Perry (1966) 42 TC 351 at 363, having said on the same page that:-

The Judge in the FTT went on to hold that ;-

At the very outset of his judgment the Judge had identified the issue as whether the payments in question were earnings “from employment”, explaining that they were liable to income tax, if they were “emoluments from employment”, and to NICs, if they were “remuneration or profit derived from employment”.

The Judge made particular findings of fact about the genesis and nature of the payments and the reasons for, and the effect of, making them:-

the genesis of the payment lay in the concern which the employees (through their representatives) had that they would lose the benefit of a defined benefit pension scheme on transfer;

the payments were made, both from the employers’ and the employees’ perspective, as compensation for that change in pension scheme;

the payments were made because, had they not been made, it was likely that industrial action would have followed;

industrial action would have been damaging to the business of KNDL;

avoiding industrial action enabled a smooth transition to the new venture and such a transition was sought both by employees and employers.

In his discussion of the rival submissions the Judge also said:-

In his section “Conclusions” following his review of the authorities Judge Hellier said this:-

At the first level of appeal Newey J (sitting in the UT) concluded that Judge Hellier was legally entitled to arrive at the conclusions that he did and dismissed the appeals.

Having summarised the facts, cited the relevant legislation and set out the rival submissions, Newey J rejected the appellants’ challenge to the judge’s findings of fact and their criticisms of his interpretation and application of the law.

It was argued on the appellants’ behalf by the counsel then appearing for them that the Judge had wrongly focused on why the payments were made and had failed to recognise that the employee’s standpoint was key. Newey J concluded that the Judge could not be criticised on those grounds and that he was entitled to take the view that the causes and reasons for the payments were key to determining why they were “from” employment. More specifically he did not accept the submission that the Judge had not provided an answer to the question where the payments were “from”. The Judge had stated in terms that-

Newey J agreed with the Judge’s comment that there was no principle that the standpoint of the recipient was the sole or principal standpoint from which the payment must be viewed and that, in any event, that point did not matter, given the Judge’s findings that it was the understanding of all parties that the payments were made both to compensate for loss of pension expectations and to ensure a smooth transfer.

The submission that the legislation contemplated only one “from” and that the Judge had failed to identify a single “from” did not find favour with Newey J, who said:-

Appearing for the appellants Mr Laurent Sykes directed the 70 pages of his written submissions (a skeleton argument, a supplemental skeleton argument designed “to set out and develop the appellants’ positive case” and points of reply) and his oral submissions to answering the following question:

He said that the FTT had answered the question in the affirmative on the basis that the payment was an inducement. If that was the correct answer to that question, he submitted that something would have “gone very wrong with the law” and common sense and tax law would have parted company. No worker, who had lost valuable pension rights, which were only partly compensated for by the payment received, would have described the compensation as an “inducement.” The payment was not referable to, or a reward for, services and nothing else: see Shilton v. Wilmshurst [1990] STC 55 at page 62 and [1991] STC 88 at 94g-h. It was a payment referable to “something else” other than services. The payment was secured by threat of industrial action as compensation for loss of pension rights, which was not a payment “from” employment and which was in a sum that did not attract liability to tax, being within the limits of a £30,000 exemption: see Tilley v. Wales [1943] AC 386.

Mr Sykes contended that there were a number of errors of law in the judgments below. The FTT judge had failed to weigh all of the reasons for a payment against each other in order to determine whether a payment was an emolument from an employment. The two reasons for the payment found by the FTT judge (the pensions compensation reason and the threat of industrial action reason) were capable of being weighed up against each other or ranked. The Judge wrongly considered that a single employment related reason (the threat of industrial action) for the payment was determinative of its source, or of what it is “from”, and refused to consider other relevant factors. All the reasons for the payment should have been considered, not merely a single one. The categorisation of the payment as in the nature of a reward or inducement was the result of taking a legally flawed approach and was clearly unrealistic. The fact was that industrial action would not have been threatened and the payments would not have been made but for the loss of pension rights, which was the “genesis” of the unrest and of the payments themselves. The payments were only made to those who had benefited from the pension scheme. That was the dominant reason. The facts found in the FTT only admitted of that answer to the question why the payments were made.

Mr Sykes cited Tyrer v. Smart [1979] STC 34 at 36 for the proposition that the reasons for the payments must be weighed to identify the relevant dominant reason for it and to determine whether it was an emolument “from” the employment. Lord Diplock described that case as adding another to the long line of cases which raise the question whether a particular benefit forms part of the employee’s emoluments from his employment so as to be taxable under Sch E. At page 36c Lord Diplock mentioned the matter of a benefit conferred by an employer for mixed motives. He said that the purpose of the employer in granting the benefit to the employee-

Mulvey v. Coffey [1942] IR 277 was cited as an instance of a court investigating and weighing up all the reasons for a payment in order to determine whether it is an emolument from the employment. That case was decided by the High Court in Dublin on appeal from the Special Commissioners. An unusual feature of the case is that two of the three judges had the same surname (Maguire P and Martin Maguire J) and that they disagreed on the question whether there was an error of law in the finding below that a sum paid to the President of University College, Dublin, in addition to his pension after his retirement, was in the nature of a personal gift on his relinquishing office and was not therefore taxable as an emolument of his office. The majority held that the finding of the personal nature of the gift was a finding of fact supported by the evidence to support it and could not be disturbed on an appeal limited to questions of law.

The arguments in support of the appeals both in the UT and in this court call for some preliminary observations.

First, this is a court of law. Some of the submissions here and below on the meaning of the word “from” were strangely reminiscent of a debate (described as one of the most important in modern philosophy) which had “as its ostensible purpose, the explanation of the meaning of the word ‘the’” (see Roger Scruton’s account of Bertrand Russell’s “theory of descriptions” in A Short History of Modern Philosophy (1984) at page 273).

When considering the cause of, or the reason for, an event or an act in a particular case, the courts steer clear of involvement in general theories of causation. Instead they apply a mix of general principle, legal policy and good-sense pragmatism to determine whether legal liability in accordance with the conditions set by the relevant rules has been established on the particular facts of the case. For example, Lord Radcliffe avoided the language of causation, of causa causans and causa sine qua non when he said this about the word “from” in Hochstrasser v Mayes (above) at p.391:-

All I need say at this point is that the use of “from” in the idea expressed in the statutory expression “earnings from an employment” and “earnings derived from an employment” in a fiscal context indicates, as matter of plain English usage, that there must, in actual fact, be a relevant connection or a link between the payments to the employees and their employment.

In the second place, these appeals are confined to questions of law: it was for the judge in the FTT, entrusted by statute with the judicial function of finding the facts, to consider all the relevant documents and oral evidence and to make findings of primary fact and proper inferences of fact, to which he then had to apply the tax legislation, as interpreted by the courts. It follows that it is not the task of the UT, or of this court, to re-decide or second guess the primary facts, their proper function being limited to questions of law, such as whether the FTT misinterpreted the law, or misapplied it to the facts, or made perverse findings of fact unsupported by any evidence, or reached a conclusion that was plainly wrong.

In the third place, the correct legal question for the court is that set by statute, not that set by the parties or even by the judges, whose role is to answer the right question as properly understood. That question is: were the payments of £4,800 to each of the appellants emoluments from employment? The answer to that question depends on the facts of each case as found by the FTT. The question on appeal to the UT and this court is whether the FTT erred in law in its answer to the statutory question.

In my judgment, the question posed on behalf of the appellants in this court is not the correct question. It differs significantly from the question set by the statute, because it includes legal and factual elements that do not feature in the legislation at all.

With that comment I turn to the judgment in the FTT and the findings of fact in it and ask whether those findings justified in law the Judge’s conclusion that the payments to the appellants were emoluments from employment?

It is tempting to follow the bold course taken by Lord Wilberforce in Brumby v. Milner (1975) 51 TC 583. He said that he would not attempt a detailed analysis or refer to such authorities as might, possibly, be relevant, since that had been done to his complete satisfaction by the Court of Appeal affirming Walton J. He concluded his 1 page opinion at p.612:-

Lords Diplock and Edmund Davies agreed. Lord Simon of Glaisdale said that there was “little that can be added” and added it. Lord Kilbrandon said that there was “little more that need be said” and said it.

There are cases in which this court may be justified in taking that summary course, even on the hearing of an appeal for which permission has been given. In this case, although the conclusions of the FTT and the UT are, in my judgment, clearly correct, I should give my own reasons for not accepting the appellants’ arguments that the decisions of the FTT and the UT were wrong in law.

First, and fundamentally, the question posed by the appellants is not the correct form of question, either for the tribunals below or for this court. As Ms Simler QC for HMRC pointed out the statutory question with which these appeals is concerned is whether the payments of £4,800 to each representative employee are liable to tax and class 1 NICs as emoluments from or derived from employment for the purposes of the provisions in the 2003 Act and the 1992 Act respectively. The appellants’ re-formulation of the question states facts selectively, by describing the payment as having been made to an employee to “compensate him or her for the loss of pension rights” and to that payment being “secured in part by the threat of industrial action”. The re-formulation also imports non-statutory concepts, such as whether the fact that the payment made for the pension purpose is secured “in part” by the industrial action threat makes it “necessarily” an emolument from the employment. Failing to answer the wrong question cannot be an error of law on the part of the tribunals below.

Secondly, the citation of numerous passages from authorities decided on different facts and the detailed comparison of the differences in the language used by different judges do not help to identify an error of law or to answer the correct question. The authorities explain the approach taken by the courts to the application of the legislation to the particular facts. Different judges choose to express their reasoning and conclusions in different words. The resources of our rich and vigorous language enable us to express the same thoughts in more than one way. The differences in the language of different judgments will often reflect the facts of the particular case or the way in which it has been argued. It is unwise to read too much into differences of judicial language on matters of statutory construction. The sovereign words are in the statute and not in the judicial exposition of it. Of all the judicial discussions of the statutory provisions and their ancestors which have been cited nothing has bettered the words of Upjohn J blessed by those judicial giants, Viscount Simonds and Lord Reid.

Thirdly, there was no misdirection of law in the FTT decision. The correct statutory provisions were set out. The key passages in the leading authorities were cited or sufficiently summarised.

Fourthly, there was no misapplication of law to the facts. There was a clear finding of fact that the payments were made to avoid industrial action; that the threat of strike action was “a substantial cause of the payment”; that the payments were in reference to the services of the employees rendered and in the nature of a reward, inducement or incentive to work willingly for the joint venture company in the future. Those facts were sufficient to establish the necessary relevant connection or link between the payments and the recipients’ employment and to justify the finding of Judge Hellier that the payments were emoluments from the employment.

Fifthly, there was no error of law in the judge reaching that conclusion, by reason of his having found that the payments were also paid as compensation for pension loss. He was entitled in fact and in law to conclude that the presence of the pension compensation factor in relation to the payments did not detract from his overall conclusion characterising the payments as being in relation to employment services and therefore emoluments from employment.

Sixthly, the relevant “weighing up” exercise which was emphasised in the appellants’ submissions was in fact properly carried out by Judge Hellier at the correct stage, that is when he evaluated the evidence and reached his conclusions of the facts relevant to the question whether the payments were emoluments from employment. There was no further exercise of weighing up the two “dissociable reasons” for the payment which the judge was required to conduct in order to answer that question. He had already answered the statutory question by his finding that the threat of industrial action was a substantial cause of the payments. The sufficiency of that finding of necessary relevant connection or link between the emolument and the employment is not cancelled out or diminished by the finding of the presence of another factor, such as the pension compensation for loss of a right unrelated to an emolument from employment.

I would dismiss the appeal. The FTT was not wrong in law to find that the payments made to the employees were emoluments “from” an employment. Judge Hellier correctly considered the circumstances of, and the reasons for, the payments. Newey J was right to dismiss the appellants’ appeal to the UT.

I also agree that the appeal should be dismissed but I wish to add a few words of my own.

The issue on this appeal is whether the payments constituted “earnings from an employment”: see s.9(2) ITEPA. It is conceded that they were “earnings” as defined in s.62(2) if they were from the employment. On that basis, they were clearly an “other profit or incidental benefit” or an “emolument”. It is also accepted that their taxability under s.401 as a payment made on the termination of employment only arises if they are not within the s.9 charge: see s.401(3).

What constitutes an emolument or other benefit from an employment has been the subject of judicial analysis for almost 100 years. As Mummery LJ has explained in his judgment, our task is to apply the statutory test to the facts found and not to apply some other test based on a gloss: see e.g. Hochstrasser v Mayes [1959] 38 TC 673 per Lord Radcliffe at p. 707. But some gloss is inevitable because it is accepted that it is not enough merely to show that the payment was received as an employee and would not have been received if the individual had not been an employee. Something more must be established. This has been expressed in terms of the difference between causa sine qua non and causa causans but it does, on any view, require a sufficient causal link to be established between the payment and the employment.

The ways in which that necessary link has been described and analysed in the earlier cases does, I think, have to be respected even though the ultimate question is whether the “from” question can be answered in the affirmative. Neill LJ in Hamblett v Godfrey [1986] 59 TC 694 at p. 726 G-H describes those explanations as valuable and authoritative. And what the cases, I think, show is that the question of taxability involves one being able to characterise the payment as one “from employment” if it derives “from being or becoming an employee” and is not attributable to something else such as a mark of esteem or a desire to relieve distress. I take this formulation from Lord Templeman in Shilton v Wilmshurst [1988] 64 TC 78 at p. 105 G-I because this is how the words “from employment” were construed and that decision is, I believe, binding on us in that respect. The same test was adopted by Lord Reid in Laidler v Perry [1966] 42 TC 351 at p. 363 and by Lord Kilbrandon in Brumby v Milner [1975] 51 TC 583 at p. 614.

It must follow from this that, in order to satisfy the s.9 test, one must be able to say that the payment is from employment rather than from a non-employment source. This has certainly been the approach of the courts in most of the decided cases, examples of which are:

Lord Diplock in Tyrer v Smart [1979] STC 34 at p. 36 c-d: “determination of what constitutes his dominant purpose”; and

Carnwath J in Wilcock v Eve [1994] 67 TC 233 at p. 232A: where there is more than one operative cause “there is an element of value judgment in deciding on which side of the statutory line the payment falls”.

This process of evaluation requires the fact-finding judge to make findings of primary fact based on the evidence as to the reasons and background to the payment and then to apply a judgment as to whether the payment was from the employment rather than from something else. To this extent, I agree with the appellants so far as they submit that having determined the causes of the payment that process of characterisation must then follow. The interpretation of the words “from employment” by the House of Lords in the cases referred to makes that an inevitable step in answering the statutory question. Although this is the only question (see Russell LJ in Bramby v Milner at p. 608), it still has to be answered.

The judge in this case set out the reasons for the payment in paragraph 34 of his judgment and we cannot go behind them. He said they were indissociable (para 35) and they were in the sense that the loss of pension rights was what sparked the dispute and had to be compensated for. But it was the consequences of the possible dispute which caused the payment to be made. This was a substantial cause of the payment (see para 103).

The criticism of the judge is that he did not decide what was the dominant cause of the payment or, in the language of s.9, whether it was from the employment and HMRC has responded to this with their arguments to the effect that a contributing cause which is more than marginal but which is an employment-based cause can bring the payment into charge even if there are other substantial non-employment causes.

I do not accept that this is a correct statement of the law but it does not, I think, arise on a proper reading of the judgment in this case. Mr Sykes criticised the judge for treating the loss of pension rights and the threat of industrial action as equal causes. I am not satisfied that on a fair reading of his judgment this is what the judge did. The highest that Judge Hellier put it was that a payment can be from employment even though there are other reasons for it: see para 103 of his judgment. This is obviously right. In all the cases I have referred to there are competing causes. Obvious examples are Laidler v Perry (staff Christmas bonuses) and Cooper v Blakiston [1908] 3 TC 343 (an incumbent’s Easter offerings). In each case the payments were in part motivated by feeling of generosity towards the recipient. Employment does not have to be the sole cause but it does have to be sufficiently substantial as to characterise the payment as one from employment.

The judge seems to me to have carried out this exercise. After stating the principle in paragraph 103, he then identifies a substantial cause as the need to avoid strike action. On that basis, he decides in para 104 that the payment was taxable because it was paid for that purpose. The fact that it was also compensation for loss of pension rights does not affect that conclusion.

On a proper reading of his judgment this is, I think, a conventional approach to causation and clearly a correct one. The loss of pension rights was historically the source of the dispute but things moved on and the possibility of industrial action became the reason for the payment. Mr Sykes is therefore wrong to say that there was no weighing up, as he puts it, and on this basis I would dismiss the appeal.

But even if the correct view of the judge’s findings of fact is that the loss of pension rights and the threat were equal rather than successive causes of the payments then the same conclusion must, I think, follow. It is impossible in those circumstances to say that the payments were not from the employment even though they were compensatory in nature. If the employment is a substantial and equal cause of the payment, it becomes open to the judge to say that the statutory test is satisfied. The payment is then from the employment even if it is also substantially attributable to a non-employment cause.

I agree with both judgments. The employment had to be a sufficiently substantial reason for the payments as to characterise them as payments from employment. The Judge found that it was. The appeal must therefore be dismissed.