Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
THE HONOURABLE MR JUSTICE PATTEN
Between :
| Ian Wilson (HM Inspector of Taxes) | Appellant |
| - and - |
|
| Stephen Clayton | Respondent |
Adam Tolley (instructed by Solicitor to Inland Revenue) for the Appellant
Glenn Willetts (instructed by Thompsons) for the Respondent
Hearing dates: 5th - 6th February 2004
Judgment
Mr Justice Patten :
Introduction
This is an appeal by the Crown by way of case stated from a decision of the General Commissioners for Income Tax for the Division of Birmingham made on 11th April 2003. The issue before the General Commissioners was whether the Respondent, Mr Clayton, was properly assessable to income tax in respect of the payment of £5,060 which he received from his employer, Birmingham City Council ("the Council") following the compromise of remedy proceedings in the Birmingham Employment Tribunal ("the Tribunal"). Those proceedings followed a decision by the Tribunal that Mr Clayton and a number of other Council employees had been unfairly dismissed when the Council in 1997 terminated their existing contracts of employment and re-employed them on terms which excluded a car user allowance.
The essential facts, as found by the General Commissioners, are set out in paragraph 5 of the case stated, as follows:
In 1997 the Birmingham City Council, in order to make savings in the Council’s budget, decided to review the benefit given to some of its employees of an essential car user allowance (‘ECUA’) which was a payment for the fact that an employee had to use his or her own car at work in the normal execution of their duties. As a result, the decision was taken that savings could be made by scrapping ECUA for those doing less than 3000 miles a year. It was also suggested that the discretion to grant ECUA in such cases should also be removed.
Towards the end of 1997, letters were sent by the Council to relevant employees, of which the Respondent was one, asking for formal agreement to the removal of ECUA allowance with effect from a certain date in the future. Those employees were informed, in clear terms, that if such agreement was not forthcoming, their employment contracts would be terminated and a new contract of employment offered at the same time which would be identical save for the fact that they would only receive an ECUA if they completed more than 3000 miles per annum.
It was common ground that the Respondent did not agree to the removal of ECUA and that, in accordance with the terms of the letter, his employment contract was terminated and he was immediately reinstated on the new terms and conditions. The Respondent continued to be employed by the Council but no longer had ECUA.
Thereafter, a large number of affected employees commenced proceedings against the Council for unfair dismissal. It was common ground that the Respondent was one of those employees. Two of the employees presented their cases as test cases to the Employment Tribunal in Birmingham.
On 3 March 2000 the Tribunal held that the employees had been unfairly dismissed and the matter was subsequently listed for a remedy hearing for all the applicants whose contracts had been renewed.
At the remedy hearing on 12 July 2000 the Tribunal made an order, by consent, the relevant parts of which were:
‘1 …
[a] the [Birmingham City Council] will reinstate pursuant to section 114 Employment Rights Act 1996 all the Applicants whose applications listed in the attached schedule ("the Applicants") within 28 days with their right to Essential Car User Allowance (ECUA) restored.
[b] the [Birmingham City Council] will calculate and pay to "the Applicants" Basic Awards pursuant to section 119 Employment Rights Act 1996 within 28 days.
It was common ground that in accordance with paragraph 1(a) of the Order the Respondent has been reinstated and his right to ECUA restored’
A payment of £5,060.00 was made by the Council to the Respondent pursuant to paragraph 1(b) of the Order."
The General Commissioners allowed the taxpayer’s appeal against the Revenue’s amendment to his self-assessment and confirmed the assessment in the amount initially made. They did so on the basis that the payment of £5,060 was not chargeable to tax under s.19 ICTA 1988 as an emolument or under s.154 ICTA 1988 as a benefit in kind. They decided that the payment fell within s.148 ICTA 1988 as a payment not otherwise chargeable to tax received in connection with the termination of the taxpayer’s employment. Because the payment did not exceed the £30,000 threshold set by s.148, it was not taxable.
The Crown’s Appeal
The Crown accepts that compensation for unfair dismissal awarded by an employment tribunal will ordinarily fall within s.148 and will not be taxable as either an emolument or a benefit in kind. But Mr Tolley, for the Appellant, submits that this case is different because the sum awarded and paid to the taxpayer under the Tribunal’s order of 12th July 2000 was one which it had no jurisdiction to make and therefore, as a matter of analysis, did not make. The General Commissioners were therefore wrong as a matter of law to determine that it fell within s.148.
This argument was raised by the Crown before the General Commissioners but rejected. However, the Commissioners gave no reasons for reaching their conclusion on this point, other than to say that the taxpayer’s employment had been terminated and that the payment was received by the taxpayer "in connection with that termination under section 119 ERA 1996". This is a reference to the Employment Rights Act 1996 ("the 1996 Act"), which provides a complete statutory code dealing with cases of unfair dismissal and was the statute in force at the relevant time. Section 111 of the 1996 Act creates a statutory right for an employee to present a complaint of unfair dismissal to an employment tribunal. When the complaint is well-founded, the tribunal has power under ss.112 and 113 to order either reinstatement or re-engagement of the employee. Section 114, which deals with reinstatement, provides that:
An order for reinstatement is an order that the employer shall treat the complainant in all respects as if he had not been dismissed.
On making an order for reinstatement the tribunal shall specify—
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,
any rights and privileges (including seniority and pension rights) which must be restored to the employee, and
the date by which the order must be complied with.
If the complainant would have benefited from an improvement in his terms and conditions of employment had he not been dismissed, an order for reinstatement shall require him to be treated as if he had benefited from that improvement from the date on which he would have done so but for being dismissed.
In calculating for the purposes of subsection (2)(a) any amount payable by the employer, the tribunal shall take into account, so as to reduce the employer’s liability, any sums received by the complainant in respect of the period between the date of termination of employment and the date of reinstatement by way of—
wages in lieu of notice or ex gratia payments paid by the employer, or
remuneration paid in respect of employment with another employer,
and such other benefits as the tribunal thinks appropriate in the circumstances."
If no order had been made for reinstatement or re-engagement, then the Tribunal was under a duty to make an award of compensation for unfair dismissal: see s.112(4). Such an award would consist of a basic award (calculated in accordance with ss.119-122 and 126) and a compensatory award: see s.118(1). What the Tribunal could not, however, do was to order reinstatement (including the payment of arrears of salary and lost benefits) under s.114 and make an award of compensation under s.119. This would result in a form of double recovery.
In the present case the Tribunal did in fact purport to make an order under both s.114 and s.119 of the 1996 Act. Although the General Commissioners made no specific findings about this, what appears to have happened is that the Tribunal gave its reserved decision on the issue of unfair dismissal on 3rd March 2000 and adjourned the issue of remedy to a further hearing. No such hearing took place because the Council and the employees reached agreement on an order, which was signed on behalf of the Council and the applicants and then made as an order by consent. The Tribunal ordered the Council to reinstate the taxpayer and the other employees within 28 days, with their right to the car allowance restored. It made a basic award of compensation pursuant to s.119 and also ordered the Council pursuant to s.114(2)(a) of the 1996 Act to pay to the employees the amount of lost additional remuneration in the form of the car allowance between the date of termination of their employment and the date of reinstatement.
The order for reinstatement was made in this form because the taxpayer had, of course, been re-employed at the same salary immediately following his dismissal in 1997. What he and the others had lost was the additional payment by way of car allowance, and paragraphs 1(a) and (c) of the order of 12th July 2000 restored this both retrospectively and prospectively. The additional payment of a basic award under s.119 was, on any view, a bonus.
The taxpayer continued to be assessed to income tax under Schedule E on his salary following his re-employment in 1997. He also accepts that the payment of the car allowance in arrears under s.114 and for the future is taxable as an emolument under s.19 ICTA 1988. It was received under the order for reinstatement as additional pay for past services, even though it resulted from an order of the Tribunal. I am not called upon to decide whether this concession was correctly made. The issue centres on the payment of the basic award under paragraph 1(b) of the Tribunal’s order. Mr Tolley submits that this payment should be accorded the same tax treatment. It could not be, and therefore was not, he says, a payment of compensation for unfair dismissal, because the Tribunal had no jurisdiction to make such an order, and the order for reinstatement under s.114 which it did make had the effect of requiring the taxpayer to be treated throughout as if he had not been dismissed. The payment of the £5,060 was therefore only referable to his past and continuing employment and is taxable either under s.19 as an emolument or under s.154 as a benefit in kind.
Before turning to the particular provisions of the 1988 Act which are said to make the payment taxable, I need to say a little about what I consider to be the status and effect of the Tribunal’s order. Firstly, it is common ground between the parties to this appeal that the Tribunal had no jurisdiction to make both an order for reinstatement and an order for compensation, and that no such order could have been made after a contested remedy hearing. Therefore, whatever else it may be, the payment of the £5,060 made to the taxpayer was not an award of compensation under s.119 of the 1996 Act. The second point to make is that although the Tribunal did by consent order reinstatement, the only practical effect of that order was to reimburse the taxpayer for the car allowance payments which he would have received since 1997, had his original employment continued. The effect of an order under s.114 is to reinstate an employee on terms which include compensation for lost pay and other similar benefits in the intervening period between dismissal and reinstatement. It cannot and does not create a period of service as such between those dates. The employee’s original contract of employment was terminated on dismissal. A new contract can be brought into being on comparable terms as a consequence of a s.114 order. In this particular case the taxpayer was in fact re-employed back in 1997 and therefore the only effect of the s.114 order was to provide him with additional remuneration (in the form of the car allowance) in arrears for the interim period and to amend his terms of employment for the future so as to include the car allowance as part of his continuing remuneration. The third point (which is the obvious consequence of the first two) is that the paragraph 1(b) payment was a purely voluntary one. It was not a payment which the Tribunal 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. It was a payment contractually agreed between the Council and the taxpayer in the context of a finding of unfair dismissal and an order for an adjourned remedy hearing. No other facts were found by the General Commissioners as to the circumstances in which paragraph 1(b) of the Tribunal’s order came to be made.
Section 19 sets out the charge to tax under Case 1 of Schedule E as follows:
Tax under this Schedule shall be charged in respect of any office or employment on the 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, subject however to section 192 if the emoluments are foreign emoluments (within the meaning of that section) . . . ; "
An "emolument" for these purposes is defined by s.131(1) as including "all salaries, fees, wages, perquisites and profits whatsoever". These provisions are supplemented by s.154, which treats as emoluments for purposes of Case 1 certain types of benefits in kind. Section 154 provides that:
" (1) Subject to section 163, where in any year a person is employed in [employment to which this Chapter applies] and—
by reason of his employment there is provided for him, or for others being members of his family or household, any benefit to which this section applies; and
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.
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), excluding however—
any benefit consisting of the right to receive, or the prospect of receiving, any sums which would be chargeable to tax under section 149; and
any benefit chargeable under section 157, 158, [159AA,] [ . . . ] 160 or 162;
and subject to the exceptions provided for by [sections 155][, 155ZA][,155ZB][, 155AA][, 155A and 156A]]."
The exceptions referred to in s.154(2) are of no application, but the reference in subsection (1)(a) to benefits being provided "by reason of his employment" has to be read in the light of s.168(2) and (3), which contain the following interpretative provisions:
" (2) Subject to section 165(6)(b), "employment" means an office or employment the emoluments of which fall to be assessed under Schedule E; and related expressions shall be construed accordingly.
For the purposes of this Chapter―
all sums paid to an employee by his employer in respect of expenses, and
all such provision as is mentioned in this Chapter which is made for an employee, or for members of his family or household, by his employer,
are deemed to be paid to or made for him or them by reason of his employment, except any such payment or provision [which is made by the employer, being an individual, in the normal course of his domestic, family or personal relationships]."
For completeness I need also to mention the exceptions from the general charge contained in s.155. Section 155(4) provides that:
"Section 154 does not apply to a benefit consisting in the provision by the employee’s employer for the employee himself, or for the spouse, children or dependants of the employee, of any pension, annuity, lump sum, gratuity or other like benefit to be given on the employee’s death or retirement."
Section 148(1) of the 1988 Act, on which the General Commissioners based their decision, applies only if the payments and other benefits are not otherwise chargeable to tax. One therefore has to begin with an examination of the scope of the charge under ss.19 and 154. In the case of s.19 the determinant of liability is that the emolument as defined should be one from the office or employment. Mr Tolley accepts, I think, that the payment in question (unlike the arrears of car allowance or arrears of salary payable under s.114 of the 1996 Act) is not easily described as a salary, fee or wages, but it is, he says, a profit derived from the taxpayer’s employment, having regard to the status of the payment and the context in which it was made. Given that it could not be, and was not, a payment made under s.119 of the 1996 Act, and having regard to the fact that the Tribunal by consent ordered the Council to treat the taxpayer (under s.114) in all respects as if he had never been dismissed, the correct course is to treat the payment as directly connected with, and referable to, the taxpayer’s past and continuing employment. It is, Mr Tolley submitted, the equivalent of a gratuity paid by the Council to one of its employees.
It is clear from the authorities relevant to s.19 that, to be taxable, the payment need not be made as a term of the contract of employment. Voluntary payments are included within the charge if made by way of payment for services. The discretionary bonus is perhaps the most obvious example. In Seymour v. Reid (1927) 11 TC 625 at pages 645-6, Lord Kay VC dealt with the point in this way:
"[I]t must now (I think) be taken as settled that [the words -- salaries, fees, wages, perquisites or profits whatsoever -- ] include all payments made to the holder of an office or employment as such, that is to say by way of remuneration for his services, even though such payments may be voluntary, but that they do not include a mere gift or present (such as a testimonial) that is made to him on personal grounds and not by way of payment for services."
There is no evidence to suggest that the payment in question was a mere gift or present in the above sense, but neither was it paid as a term of the taxpayer’s employment, whether original or as a result of the s.114 order. It seems to me, therefore, that in order for it to be brought into charge under s.19 as a payment for services, there has to be some evidence of the necessary causal link between the payment made and the services rendered, whether past or future. The mere fact that the payment was made between an employer and its employee is not sufficient in itself to make the payment taxable under s.19. On that basis any payment, of whatever nature, would be caught.
Perhaps the best-known judicial statement of what constitutes a taxable emolument under s.19 is to be found in the speech of Lord Radcliffe in Hochstrasser v. Mayes [1960] AC 376 at page 391, where he said this:
". . . it is not easy in any of these cases in which the holder of an office or employment receives a benefit which he would not have received but for his holding of that office or employment to say precisely why one considers that the money paid in one instance is, in another instance is not, a ‘perquisite or profit ... therefrom.’
The test to be applied is the same for all. It is contained in the statutory requirement that the payment, if it is to be the subject of assessment, must arise ‘from’ the office or employment. In the past several explanations have been offered by judges of eminence as to the significance of the word ‘from’ in this context. It has been said that the payment must have been made to the employee ‘as such’. It has been said that it must have been made to him ‘in his capacity of employee’. It has been said that it is assessable if paid ‘by way of remuneration for his services’, and said further that this is what is meant by payment to him ‘as such’. These are all glosses, and they are all of value as illustrating the idea which is expressed by the words of the statute. But it is perhaps worth observing that they do not displace those 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. It is just because I do not think that the £350 which are in question here were paid to the respondent for acting as or being an employee that I regard them as not being profits from his employment."
Similarly, in Shilton v. Wilmshurst [1991] 1 AC 684 at page 689B (a case on s.181 ICTA 1970 which was in identical terms to s.19) Lord Templeman described the scope of the charge in these terms:
"Section 181 is not limited to emoluments provided in the course of employment; the section must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, secondly, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that an emolument "from employment" means an emolument ‘from being or becoming an employee’. The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived "from being or becoming an employee" on the one hand, and an emolument which is attributable to something else on the other hand, for example, to a desire on the part of the provider of the emolument to relieve distress or to provide assistance to a home buyer. 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’."
In some cases judges have resorted to a causal analysis. So in Laidler v. Perry [1966] AC 16 at page 34F, Lord Hodson said that:
"The appellant relied on a decision of your Lordships in Hochstrasser v. Mayes as establishing that not every payment or benefit given to an employee by his employer is necessarily given to him as an emolument of his employment, for the relationship may be the causa sine qua non of the payment or benefit; but that of itself is not enough. It is only when the employment is the causa causans of the payment or benefit that tax liability exists.
. . . . . .
The Hochstrasser case depended on its own peculiar facts, there being a collateral arrangement between employer and employed quite outside their contracts of service to compensate the employees for any losses they might incur on selling their houses on transfer from one post to another. It was held that these payments were not made in reward for services and that they were not taxable."
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.
In Henley v. Murray [1950] 1 AER 908, the Court of Appeal had to consider the tax status of a payment made to the managing director of a company, who received £2,000 to leave the service of the company. The payment was calculated on the basis of the remuneration he would have received, had he remained in employment until the earliest date on which the contract could have been determined by notice. The Court of Appeal held that the payment was made in consideration of the abrogation of his contract of employment and not under it. Sir Raymond Evershed MR, at pages 909F-H and 910C-E, analysed the position in this way:
"There is another class of case where the bargain is of an essentially different character, viz, where the contract itself goes altogether and some sum becomes payable for the consideration of the total abandonment of all the contractual rights which the other party had under the contract. In the course of the argument an extreme case was put to counsel for the Crown of an employer who wrongfully breaks a contract of service and discharges a servant wholly therefrom and the servant then sues for damages for wrongful dismissal. Although, of course, it is true to say that the sum awarded as damages arises from the contract in the sense that if there had never been a contract the sum of damages could never have been awarded, counsel admitted that, in a case of that sort, it would be impossible to suggest that the sum awarded to the servant for damages was taxable under sched E.
In the circumstances of the present case also it is not open to the Crown to say that this sum of £2,000 odd constituted profits from the office or employment, since, on its true analysis, it constituted the consideration payable to the taxpayer for the total abrogation imposed on him of his contract of employment, so that from 6 July 1943, no contract existed under which that figure or any other sum could be paid. I, therefore, come to the conclusion on the facts that this case is of the second class, namely, one in which the agreement itself ceased altogether to exist for all purposes on 6 July 1943.
. . . . . .
. . . the essential question is not the form in which the salary is paid, but the fact that it is remuneration—that it is reward for services under a subsisting agreement. None of that language seems to me to have any application once the essential fact is accepted that in the present case there ceased to be any contract of service, and, therefore, from that date onwards there was no remuneration. This was not a sum paid in advance because there was no future claim which the taxpayer could ever assert, nor was it reward for his past service. It was a cash consideration paid for his agreeing to submit to the terms which the assurance society sought fit to impose."
In the present case the contract of employment relevant to the payment had been terminated in 1997. There was therefore no subsisting agreement for services to which the payment could relate, nor were there any arrears due under that contract for which it was intended to provide. Therefore unless the payment can be linked to and treated as a payment for services under the new contract subsisting since 1997, it is not taxable as a profit under s.19. For the reasons already given, there is no basis for treating it as such a payment.
One of the authorities relied upon by Mr Tolley was the decision of the Court of Appeal in Hamblett v. Godfrey [1987] 1 WLR 357. This concerned a payment of £1,000 made to a civil servant working at GCHQ at the time when the conditions of service were varied to exclude a right to trade union membership. The employees were offered a choice between accepting the revised conditions or being transferred to work elsewhere. Those who chose to remain at GCHQ under the new conditions of employment received the payment in recognition of their loss of rights. The Court of Appeal held that these payments were taxable as emoluments under what was then s.181 ICTA 1970. After considering the earlier authorities such as Hochstrasser v. Mayes and Laidler v. Perry, Purchas LJ (at pages 367h and 368d) set out his conclusions as follows:
"So, in my judgment, the approach that the court should take, and, indeed, that Knox J did in fact take, is to consider the status of the payment and the context in which it was made. The payment was made to recognise the loss of rights. I am now going to paraphrase, I hope accurately, from the findings of the Special Commissioners and the employers’ letter and other records. The rights, the loss of which was being recognised, were rights under the employment protection legislation, and the right to join a union or other trade protection association. Both those rights, in my judgment, are 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. So, I start from the position that those are rights directly connected with employment.
. . . . . .
There is no doubt in this case that the employment protection legislation goes directly to the employment of the taxpayer with the employer. The right to join a union, in my judgment, also falls directly to be considered as in connection with that employment, because without the employment there is no purpose in joining the union except for esoteric or personal reasons involved in particularly sensitive areas of government service might be required to abandon their right of freedom of speech. In such a case, it would clearly have to be considered on the facts involved in the individual case to see whether the abandonment of that fundamental right was in fact connected and arose on the employment or not, and it would clearly differ from case to case."
Neill LJ at pages 370e to 371a said this:
"It is plain that the taxpayer received her payment as a recognition of the fact that she had lost certain rights as an employee, and by reason of the further fact that she had elected to remain in her employment at GCHQ. Accordingly, if I may adopt the language of Lord Radcliffe in the passage I have referred to, the payment to the taxpayer was made in return for her being and continuing to be an employee at GCHQ, or to use the words of Viscount Simonds, the payment accrued to the taxpayer by virtue of her employment. But in the end I think it is right to base my decision on the wording of the statute. It is clearly not enough that the payment was received from the employer. The question is: was the payment an emolument from the employment? In other words, was the employment the source of the emolument? It was argued by counsel for the taxpayer in the course of his cogent submissions that the rights lost by the taxpayer were mere personal rights, and that, indeed, this was a stronger case from the taxpayer’s point of view than Hochstrasser v Mayes since the rights given to the employee in that case were part of a composite contract. With respect, I find it impossible to accept this argument. As the Special Commissioners held, the rights had been enjoyed within the employer-employee relationship. The removal of the rights involved changes in the conditions of service. The payment was in recognition of the changes in the conditions of service.
I have been driven to the conclusion that the source of the payment was the employment. It was paid because of the employment and because of the changes in the conditions of employment and for no other reason. It was referrable to the employment and to nothing else. Accordingly, in my judgment, the £1,000 was a taxable emolument."
One obvious and important distinction between this and the present case is that the relevant employment in Hamblett v. Godfrey continued. There was never any question of the employees being dismissed. If they had declined to accept the revised conditions, they would have been transferred to other duties elsewhere on their existing terms of employment. The payments were therefore, as Neill LJ observed, made to the taxpayer in return for her continuing to be an employee at GCHQ. They were therefore directly linked to that future employment and were made as an inducement to the employees to agree to continue on the revised terms. The case is therefore no more than an application of established principles to the particular facts of that case and does not lay down any broader test.
This was recognised by the Court of Appeal of Northern Ireland in Mairs v. Haughey 66 TC 273, where they had to consider whether a payment made to the employees of Harland & Wolff as part of the arrangements for the privatisation of the company was taxable under Schedule E. Prior to privatisation the employees were entitled to their ordinary statutory redundancy rights and, by way of top-up, to additional rights under a non-statutory Enhanced Redundancy Scheme ("ERS"). The company would have been unable to continue to fund the ERS once privatised. The taxpayer (along with other employees) was therefore offered a job in the new company, conditional upon his accepting terms of employment which excluded the ERS. In return, he received what was described as an ex gratia payment calculated at 30% of the redundancy payment he would have received under the ERS plus £100 for each complete year of service. The taxpayer accepted that the second element was taxable, but not the first. The judgment of the Court of Appeal is mainly concerned with s.154 and I will return to this later in this judgment. But the Court of Appeal rejected an argument by the Crown that the payment was an emolument within the meaning of s.19, because they regarded it as made to compensate the employees for their loss of the ERS and as the direct consequence not of their employment, but of their redundancy. At page 307 Hutton LJ (as he then was) dealt with Hamblett v. Godfrey in this way:
"I can discern no proposition of law in the judgments in Hamblett v. Godfrey to cause me to alter the opinion which I have formed in the light of the judgments of the House of Lords that the payment of £4,506 to the Respondent did not come from his employment. The facts in Hamblett v. Godfrey which led Knox J and the Court of Appeal to the conclusion that the payment of £1,000 was taxable differed in important respects from the facts in the present case. One important difference was this. I am satisfied, for reasons which I have stated, that the payment of £4,506 was not made to the Respondent to induce him to stay on in employment. But in Hamblett v. Godfrey the payment was held to be made in return for Miss Hamblett continuing to be an employee at GCHQ. In the passage which I have already cited Neill LJ stated:
" . . . the payment to the taxpayer was made in return for her being and continuing to be an employee at GCHQ." "
It seems to me that the present case is distinguishable on its facts from Hamblett v. Godfrey for similar reasons.
The treatment of the cost or value of benefits as emoluments for the purposes of s.19 depends upon the employment of the taxpayer in the year of assessment in which the benefit comes to be provided. The benefit has to be provided by reason of his employment and not be otherwise chargeable to tax as his income. If these conditions are satisfied, then an amount equal to the cash equivalent of the benefit is chargeable to tax.
Mr Willetts submits that a cash payment direct to the taxpayer is not capable of constituting a benefit within the meaning of s.154(1), but that, even if it is, the payment made to the taxpayer in this case did not fall within the description of "other benefits . . . of whatsoever nature" referred to in s.154(2). It must also follow that if the words "by reason of his employment" in s.154(1) do no more than to apply the test in Hochstrasser v Mayes to the payment under consideration, then for the reasons already given the section can have no application. There are therefore two questions to decide:
whether the cash payment in this case constituted a "benefit" under s.154(1); and if so
whether the benefit was provided by reason of the taxpayer’s employment, given the extended definition of this term in s.168)3).
Mr Willetts’ argument that a "benefit" does not include a cash payment (at least if made directly to the employee) is based upon the reference in s.154(1) to an amount equal to the cash equivalent of the benefit being chargeable to tax. These words would be of no effect, he says, if a cash payment as such could constitute a benefit. They indicate that what Parliament intended to bring into charge were services or benefits in kind, provided to or for the employee or his family, which had the effect of removing from him the cost of providing those benefits himself and so giving him a financial advantage. A cash payment to a third party (e.g. to pay school fees or household expenses) would qualify, but not a payment made to the employee himself. If the payment was made to him in cash, it would constitute a profit or perquisite within s.19 and would therefore be excluded from s.154 by s.154(1)(b).
This argument has its obvious attractions, not least in giving a structure to the charging provisions. But in Mairs v. Haughey (supra) the Court of Appeal of Northern Ireland rejected it and preferred the view of the English Court of Appeal in Wicks v. Firth [1982] Ch 355, that a benefit could include a cash payment. I regard myself as bound by this decision. It is also supported by the provisions of s.155(4), which expressly exclude from the operation of s.154 a lump sum or gratuity payable to the employee on death or retirement. This exclusion would have been unnecessary if s.154 did not extend to direct cash payments: see the reasoning of Goulding J in Wicks v. Firth [1981] 1 WLR 475 at page 480H.
The decision of the Court of Appeal in Wicks v. Firth also confirms that the words "by reason of his employment" in s.154(1) are to be construed more widely than "therefrom" in s.19. This point has to be considered in this case in the light of s.168(3)(b), which deems all benefits provided by an employer for his employee or a member of his family to have been provided by reason of the latter’s employment. On this basis Mr Tolley submits that the payment under the Tribunal’s order (being made by the taxpayer’s current employer) is to be treated as made by reason of the taxpayer’s employment and therefore as an emolument under s.19. He relies on a passage in the speech of Lord Templeman in Wicks v. Firth [1983] 2 AC 214 at page 236, where he said in relation to what was then s.61 of the Finance Act 1976 that:
"Not only does section 61 deliberately apply to every conceivable form of benefit at the cost of an employer which may be said to enure in any way to the advantage of the employee, without exception, but it would be illogical to provide any exception."
Clearly some limit has to be set to the scope of s.154, even as extended by s.168(3), and Lord Templeman’s remarks have to be read in the context in which they were made. The real question is whether the payment was a benefit within the meaning of s.154. If it was a "benefit" within that section, then the fact that it was paid by the Council as the taxpayer’s employer direct to the taxpayer brings into operation the provisions of s.168(3) and renders the payment taxable as an emolument under s.19. Although a benefit can include a cash payment, not every such payment will constitute a benefit for the purpose of s.154. Mr Tolley accepts that an award of compensation by an employment tribunal under s.119 of the 1996 Act would not be a "benefit", although paid by the employer. But this was not, he submits, an award of compensation under the 1996 Act and, looked at neutrally, it was a benefit conferred on the taxpayer by his current employer.
It seems to me that the real distinction between the present case and cases like Wicks v. Firth is that the payment made to the taxpayer resulted from a negotiated compromise of a dispute between the taxpayer and his employer about the termination of his employment in 1997. The provisions of s.168(3) are designed to avoid the arguments which arise under s.19 as to whether a payment to or for the benefit of an employee is a gift or a reward in some way for services. Distinctions of that kind are rendered irrelevant by s.168(3). But I do not accept that an agreement between employer and employee which results in a capital payment for the release of rights or the settlement of a dispute gives rise to a taxable benefit within the meaning of s.154. The payment results from the contract between the parties for the disposal of rights or the settlement of the dispute and not from the fact that they are employer and employee under a subsisting contract of employment. So in Mairs v. Haughey (supra) Hutton LJ rejected the Crown’s contention that the payment to the employees was a "benefit" within the meaning of s.154. At page 314A he dealt with the point in this way:
"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: 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 & Mayes:
‘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."
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.
The General Commissioners decided that the payment fell within s.148 and in my judgment they were right to do so. Section 148(1) provides that:
" (1) Payments and other benefits not otherwise chargeable to tax which are received in connection with―
the termination of a person’s employment, or
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."
Paragraph 2(1) of Schedule 11 to the Act states that:
“ (1) 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,
(b) by the spouse or any relative or dependant of the employee or former employee, or
(c) by the personal representatives of the former employee."
It seems to me that the payment was received "in connection with" the termination of the taxpayer’s employment in 1997 and was certainly a payment received directly or indirectly "in consequence of" that termination, as provided by paragraph 2(1) of Schedule 11. Section 148 is not framed by reference to the provisions of the 1996 Act and is not limited in scope to what is available under those provisions. The words "all payments" are wide words and ought to be given their natural meaning. The Crown’s submission that s.148 has no application is based on the argument (already referred to) that the effect of the reinstatement order under s.114 of the 1996 Act was to treat the taxpayer for all purposes as if he had never been dismissed. For the reasons already given, this argument is misconceived, but it does not in any event enable one to treat the paragraph 1(b) payment (which was not arrears of salary) as anything but a payment made in connection with the termination of the taxpayer’s employment.
Conclusion
For these reasons the appeal will be dismissed.