Lawrence Rawlinson v The Commissioners for HMRC

This matter concerns an appeal against HMRC’s decision that the payment in lieu of notice (“PILON”) made to Mr Rawlinson on termination of his employment is taxable.

For the reasons set out below, we consider that the PILON is taxable.

In addition, the appeal was made prematurely, such that no right of appeal to this Tribunal yet exists. In the circumstances, we are obliged to strike out the appeal.

We find the following background facts, which are largely undisputed.

Mr Rawlinson is a retired solicitor. He was in practice for 37 years until medical issues meant that he was unable to perform his duties.

In early 2021, Mr Rawlinson sought medical assistance for a problem with his eye. Following investigation, he was diagnosed with a rare form of cancer.

The cancer was treated with head and neck surgery, as well as post operative chemotherapy and radiotherapy.

Unfortunately, Mr Rawlinson was left unable to perform the duties of his employment. His employment at that time was with a software company (T Ltd). His role involved reviewing contracts in a dynamic commercial environment working across multiple time zones.

Initially, Mr Rawlinson remained on sick leave and was paid under income protection insurance provided by his employer. However, by July 2022 his employers moved to bring an end to his employment.

By an email from Mr Rawlinson’s line manager, T Ltd offered Mr Rawlinson two options:

Perhaps unsurprisingly, Mr Rawlinson’s decision was to enter into a settlement agreement.

Mr Rawlinson’s employment was terminated on 9 September 2022, pursuant to a settlement agreement dated 2 September 2022 (the “Settlement Agreement”).

In an email provided by Mr Rawlinson after the hearing, T Ltd confirmed that “we mutually agreed to terminate your employment, effective 9^th September 2022, due to your disability and the fact that you were no longer able to carry out the material and substantial duties of your role.”

Under the Settlement Agreement, Mr Rawlinson was paid two payments:

The termination payment was paid free of tax and is not the subject of this appeal.

The PILON was paid subject to PAYE deductions. Mr Rawlinson disputes that the payment should be subject to tax. We have made more detailed findings on the PILON later in this decision.

Mr Rawlinson sought a refund of tax from HMRC by way of a letter dated 20 June 2023 and headed “Claim for rebate under section 406(b) ITEPA 2003 (EIM 13610 and EIM 13620) and Statement of practice 10/1981”. In that letter, Mr Rawlinson set out his understanding of the relevant requirements and stated

“I attach the following documents to support my claim for reimbursement of the tax and national insurance deducted from the PILON made to me by [T Ltd] £41112.82):-

- [T Ltd] Final payslip dated 30 September 2023

- [Insurance provider] – Tax certificate for the year 2022/23

- ESA 500 statement – also for the year 2022/23”

HMRC refused Mr Rawlinson’s request on the basis that the PILON was subject to tax under s 62 Income Tax (Earnings and Pensions) Act 20023 (“ITEPA”).

Following correspondence with HMRC, Mr Rawlinson submitted a notice of appeal to the Tribunal.

At the hearing, the parties were not clear on the legal basis for the appeal coming before us. However, as the parties were prepared to present on the key issue, we proceeded on the basis that we could make a decision in principle on that issue.

Following the hearing, HMRC made an application to strike out the proceedings on the basis that the Tribunal does not have jurisdiction. Mr Rawlinson responded to that application and correspondence ensued between the parties.

We have concluded that the proceedings must be struck out, for the reasons set out later in this decision.

Nonetheless, we have also provided our view on the substantive issue. The striking out of the present proceedings may simply lead to the matter coming back before the Tribunal once the necessary procedural prerequisites have been fulfilled. Therefore, as we have heard evidence and argument from both parties on the substantive issue, it seems prudent to set out our reasoning on that issue in order to save the parties from spending further time and costs relitigating the matter in future.

The sole substantive issue for us to consider is whether or not the PILON is taxable.

There are two sets of charging provisions relevant to this matter.

The first is what we refer to as ‘the general earnings charge’. Earnings is a term defined by s 62 ITEPA, as follows (so far as is relevant):

“62 Earnings

(1)

This section explains what is meant by “earnings” in the employment income Parts.

(2)

In those Parts “earnings”, in relation to an employment, means—

(a)

any salary, wages or fee,

(b)

any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or

(c)

anything else that constitutes an emolument of the employment”

This definition then feeds into the charge to tax on employment income set out in part 2 ITEPA. Under these charging provisions, Mr Rawlinson’s s 62 earnings from his employment would be charged to tax.

The second set of charging provisions is set out in chapter 3 of part 6 ITEPA. We refer to this second set of provisions as ‘the termination payments regime’.

The first section in the termination payments regime is section 401 ITEPA, which provides (so far as is relevant):

“401 Application of this Chapter

(1)

This Chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with—

(a)

the termination of a person’s employment,

(b)

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

(c)

a change in the earnings from a person’s employment,

by the person, or the person’s spouse or civil partner, blood relative, dependant or personal representatives.

(2)

Subsection (1) is subject to subsection (3) and sections 405 to 414A (exceptions for certain payments and benefits).

(3)

This Chapter does not apply to any payment or other benefit chargeable to income tax apart from this Chapter.

(4)

For the purposes of this Chapter—

(a)

a payment or other benefit which is provided on behalf of, or to the order of, the employee or former employee is treated as received by the employee or former employee, and

(b)

in relation to a payment or other benefit—

(i)

any reference to the employee or former employee is to the person mentioned in subsection (1), and

(ii)

any reference to the employer or former employer is to be read accordingly.”

Section 406 sets out the exemption upon which Mr Rawlinson relies. It provides:

“406 Exception for death or disability payments and benefits

(1)

This Chapter does not apply to a payment or other benefit provided—

(a)

in connection with the termination of employment by the death of an employee, or

(b)

on account of injury to, or disability of, an employee.

(2)

Although “injury” in subsection (1) includes psychiatric injury, it does not include injured feelings.”

Mr Rawlinson argues that the PILON is exempt from tax as a result of the application of s 406(1)(b) ITEPA.

His argument is a simple one – he suggests that s 406(1)(b) provides an exemption from tax where a payment is provided on account of disability of an employee. Mr Rawlinson submits that his PILON was provided on account of his disability, and so, he submits, it must follow that the payment is exempt.

Mr Rawlinson drew our attention to HMRC’s manual entries EIM13610, 13620 and HMRC Statement of Practice 10/1981. This guidance sets out HMRC’s view on the meaning of ‘disability’ thus:

“Disability means an incapacity to fulfil the duties of an office or employment caused either: by a sudden affliction (such as a heart attack), or by the culmination of a process of deterioration of physical or mental health caused by a chronic illness (such as chronic fatigue syndrome) but not by the normal processes of ageing.”

It was common ground that the leading case on s 406(1)(b) is Hasted v Horner (67 TC 439). In that case, Lightman J (referring to earlier legislation in materially identical terms) held (at p485):

“for the exemption to be available, it must be established:

(1)

that the disability alleged by an employee is a relevant disability, that is to say, a total or partial impairment (which may arise from physical, mental or psychological causes) of his ability to perform the functions or duties of his employment, and

(2)

that the person making the payment does so not merely in connection with the termination of employment (compare the language of the exemption of payment made on the death of an employee) but on account of the disability of the employee. In short, there must be established as an objective fact a relevant disability and as a subjective fact that the disability is the motive for payment by the person making it.”

In explaining why he said he met that test, Mr Rawlinson shared the details of his medical issues (which we find as fact). The surgery entailed removal of his right eye socket, right parotid gland and the lymph nodes in the right side of his neck.

Mr Rawlinson explained (and we find as fact) that, the loss of his right eye impacted severely on his ability to work at pace, reviewing, drafting and amending contracts on multiple simultaneous projects working on three computer screens.

Mr Rawlinson stated (and we find) that he was off work for 13 months by the time his employment was terminated.

Mr Rawlinson took us to the email from his line manager (set out above). He told us that the clear intention was that if he did not accept the terms offered that he would be terminated in any event. He therefore argued that his condition fell within the definition of a disability and was the direct cause of his termination.

Mr Rawlinson also drew our attention to the terms of the income protection insurance policy. He continued to receive payments from the insurer following his termination, up until the end of the insurance cover. The policy makes payments if the employee is ‘incapacitated’, defined as being “unable, by reason of their illness of injury, to perform the material and substantial duties of the insured occupation”.

Mr Rawlinson argued that, as the insurer and employer were in agreement that the ‘incapacity’ test was met, it must follow that he had a disability for the purposes of the legislation.

Mr Rawlinson accepted that the Settlement Agreement did not expressly state that his employment was terminated as a result of his disability. He said that his lawyer had initially asked for the word to be inserted into the agreement but T Ltd refused as they did not wish to expressly state he was being dismissed because of his disability.

Overall, Mr Rawlinson argued that it was an objective fact that he had a disability within the meaning of the legislation and that it was a subjective fact that the disability was the motive for his termination.

Furthermore, and as noted above, in an email provided to the Tribunal by Mr Rawlinson after the hearing, T Ltd had confirmed that “we mutually agreed to terminate your employment, effective 9th September 2022, due to your disability and the fact that you were no longer able to carry out the material and substantial duties of your role.”

HMRC had contended in their Statement of Case (“SoC”) that the PILON was taxable as earnings within the meaning of s 62 ITEPA. However, the SoC did not explain the reason for that conclusion and instead provided a general explanation on the differences between gardening leave and PILON.

The SoC also drew our attention to EMI Group Electronics Ltd v Coldicott [1999] STC 803. In that case, payments in lieu of notice made by an employing company to employees under the terms of the employment contract were emoluments (and therefore would be earnings within the meaning of s 62 ITEPA). However, the SoC did not provide any argument as to how we ought to apply the decision to the present case.

At the hearing itself, Mr Imam, for HMRC, focussed his submissions in responding to Mr Rawlinson’s argument around s 406 ITEPA.

Mr Imam accepted that Mr Rawlinson’s condition amounted to a disability. However, as the Settlement Agreement did not expressly state that the payment was made on account of disability, the Tribunal ought not to accept that the subjective element of the Hasted v Horner test was made out. HMRC also drew our attention to the absence of any confirmation in correspondence from T Ltd that the reason for the payment was Mr Rawlinson’s disability. HMRC’s view is that, without such evidence a subjective intention cannot be established.

Before addressing the cases put forward by the parties, it may assist to first explain our understanding of the overall statutory framework.

As a starting point we note that there is an effective priority order within the legislation. Section 401(3) ITEPA provides that chapter 3 part 6 ITEPA does not apply to any payment or other benefit chargeable to income tax apart from that chapter – meaning other sections take priority. As a result, payments taxable as s 62 earnings fall outside the s 401 termination payments regime

Furthermore, the s 406 exemption only applies to payments that would otherwise be taxable under the s 401 termination payments regime. Section 406 does not provide a general exemption from tax for such payments.

Sections 402A-E ITEPA 2003 (the “post-employment notice pay provisions”) make provision for some payments that would otherwise fall to be taxed under the s 401 termination payments regime to be treated as s 62 earnings. However, as s 406 disapplies the entire termination payments chapter, where the s 406 exemption applies, these provisions cannot have effect. The 402A-E provisions govern how the s 401 regime operates in respect of a payment, whereas the s 406 exemption governs whether or not the regime applies at all.

This results in the following prioritisation:

It is common ground that the s 401 regime will apply to tax the PILON in the event that s 62 does not (the second requirement above), leaving only the first and third to be determined.

Therefore, in order for Mr Rawlinson’s appeal to succeed, he must establish both (i) that the PILON was not taxable as earnings under s 62 ITEPA and (ii) that the s 406 exemption applies so that the PILON is not taxable under the termination payments regime.

HMRC had asserted in their SoC that the PILON in this case was taxable as earnings under s 62 ITEPA. If that were the case, the disability exemption would not modify the tax treatment and Mr Rawlinson’s appeal would fail.

Section 62 defines the following as earnings:

We first make findings as to the contractual underpinnings of the PILON.

Mr Rawlinson’s contract of employment set out the notice he was entitled to in order to terminate his employment. The contract provided that, following completion of his initial performance review period he was entitled to either 3 months or 1 week per year of service (up to a maximum of 12 weeks) whichever is higher.

It was not suggested that Mr Rawlinson had a pre-termination contractual right to be paid in lieu of notice (or that T Ltd had a right to opt to make a payment in lieu), either arising from his contract or from existing custom or practice. The right to the PILON arose from the Settlement Agreement itself.

The Settlement Agreement provided for the PILON in clauses 1.3 and 2.2. Clause 1.3 provided:

“Notice

1.3

In accordance with clause 3.3. below the Company shall make a payment to the Employee in lieu of his notice entitlement under his employment contract (the PILON). The parties agree that the amount of the PILON is equal to or exceeds the amount given by the formula in section 402D(1) of ITEPA and, accordingly, believe that the Employee’s Post-Employment Notice Pay is nil”

Clause 2.2. provided:

“Payments

2.2

The Company shall pay to the Employee, within 28 days of either the Termination Date of the date both parties sign this Agreement and the Company receives the signed and dated letter from the Adviser in the form as set out in Schedule 1, whichever is the later, the following:

(a)

£15,000 in lieu of the Employee’s entitlement to notice of three months.

Subject to deductions for income tax at the appropriate rate (for which the Company shall account to HM Revenue and Customs) and employee national insurance contributions and subject to sub clauses 3.2 and 3.3. below.”

Clauses 3.2 and 3.3 essentially provide that Mr Rawlinson would be liable for any tax (over and above the PAYE tax already deducted) on any payments made under the Settlement Agreement.

HMRC made reference to EMI Group Electronics Ltd v Coldicott [1999] STC 803. In that case, payments in lieu of notice, made by an employing company to employees under the terms of the employment contract, were emoluments (and therefore would be earnings within the meaning of s 62 ITEPA).

We consider that this case is of limited guidance as in this case the PILON was only agreed to once termination was very much in prospect.

Where a PILON is agreed as a part of the termination process itself, it would not normally fall within the definition of earnings set out above. Therefore, we consider that the PILON in the present case falls outside the s 62 earnings definition.

We therefore decide this point in Mr Rawlinson’s favour. ThePILON is not taxed under s. 62.

Mr Rawlinson’s primary contention throughout his correspondence with HMRC, and the present proceedings, is that he falls within the exception set out in s 406(1)(b) ITEPA.

He considers that it offers a complete exemption from tax. For the reasons we have outlined above, we disagree with Mr Rawlinson that the section provides a complete exemption from tax. The s 406 exemption does not affect payments taxable pursuant to s 62 ITEPA.

However, for the reasons set out above, as we have found that the PILON falls outside the s 62 definition (and it is common ground that it falls within s 401) then s 406 would provide a relief from tax if it applied. We therefore consider whether Mr Rawlinson is correct to suggest that s 406(1)(b) applied to the PILON.

The s 406(1)(b) test applies to payment provided on account of the disability of an employee. We have set out above the relevant passage from the leading case of Hasted v Horner in interpreting the test. It is worth restating the summary of the test as having both subjective and objective limbs thus:

“In short, there must be established as an objective fact a relevant disability and as a subjective fact that the disability is the motive for payment by the person making it.”

It is accepted by HMRC that the objective limb of this test is made out. We unhesitatingly find that Mr Rawlinson had a disability within the meaning of the section.

In relation to the subjective limb, the picture is less clear. HMRC suggest that the fact that the Settlement Agreement makes no mention of disability, and that there is no other statement from T Ltd (the paying party) means that we cannot find that the subjective reason for the payment was the disability. We reject that suggestion. It is perfectly possible for a Tribunal to draw inferences as to subjective intention from the primary factual evidence put before it.

However, it is important to draw a distinction between the reason for Mr Rawlinson’s termination, and the reason for the payment.

The test set out in section 406(1)(b) is expressed by reference to “a payment” and must be applied to each payment separately. In other words, the PILON itself must be made on account of the disability, it is not sufficient that the termination is on account of disability.

Furthermore, it is significant that the legislation refers to a payment made ‘on account of’ disability. This implies that a simple ‘but for’ connection between the disability and the payment is not sufficient (otherwise all payments following a termination for disability would fall within the exemption). We consider that the disability must be the proximate cause of the payment. In the words of Lightman J in Hasted v Horner, it must be the case that “the disability is the motive for payment by the person making it.”

In the present case, we are persuaded that the reason for the termination of Mr Rawlinson’s employment was his disability. His loss of one eye meant that he could no longer carry out the duties of his employment, he was on sick leave for over a year and was then sent an email by his line manager indicating that termination was highly likely to result if Mr Rawlinson did not accept a settlement. We consider there is ample evidence to conclude that the underlying reason for Mr Rawlinson’s termination was his disability. The position is further supported by the additional email provided by Mr Rawlinson after the hearing.

However, as explained above, in our view this is not sufficient to establish that the test in s 406(1)(b) has been met. We must consider whether or not T Ltd’s motive for making the payment was Mr Rawlinson’s disability, or something separate from it.

The PILON was expressly stated in the Settlement Agreement as being made in lieu of Mr Rawlinson’s notice entitlement under his employment contract. A separate ex gratia payment was also made.

Being a payment in lieu of notice, if T Ltd had not made the PILON, Mr Rawlinson could have brought legal proceedings against T Ltd to obtain a payment in compensation for not being given notice of termination. The payment was therefore made to discharge the right to notice. That right would have existed regardless of the reason for termination.

As a result, we consider that the payment was not made on account of Mr Rawlinson’s disability. T Ltd’s motivation for making the PILON was to discharge its contractual obligation to provide him with notice of termination.

This means that the s 406(1)(b) test is not met and the payment is not thereby exempted from the s 401 termination payments regime.

Mr Rawlinson’s substantive argument therefore fails.

At the hearing of this matter, the Tribunal sought clarity from the parties as to the legal basis for the appeal. We invited the parties to make written submissions on the point following the hearing.

Following the hearing, HMRC made an application to strike out the proceedings on the basis that the Tribunal does not have jurisdiction. Mr Rawlinson responded to that application and correspondence ensued between the parties.

HMRC submitted that no right to appeal exists because HMRC had not opened or concluded an enquiry under s.9A Taxes Management Act 1970 (“TMA”), in relation to a self-assessment return or under Schedule 1A TMA for a standalone claim.

HMRC also submitted that Mr Rawlinson’s Letter seeking a refund from HMRC could not constitute a valid claim under Sch 1AB TMA 1970 on the basis that such a claim must include a declaration to the effect that all the particulars given in the form are correctly stated to the best of the information and belief of the person making the claim. We note that, if Mr Rawlinson had made such a claim and HMRC had not enquired into it then HMRC would be bound to give effect to that claim forthwith.

HMRC suggest that the requirement for such a declaration arises from paragraph 2 of Sch 1A TMA 1970, which provides (so far as is relevant):

“2

...

(3)

A claim shall be made in such form as the Board may determine.

(4)

The form of claim shall provide for a declaration to the effect that all the particulars given in the form are correctly stated to the best of the information and belief of the person making the claim.”

This provision binds HMRC to include a requirement for the declaration in the requirements it publishes as to the form of a claim. It is not drafted so as to directly bind a taxpayer.

Rather surprisingly, HMRC appear not to have published a form of claim. Instead, in HMRC’s written submissions they relied upon extracts from their own internal manuals which describe to HMRC officers what to expect a claim to include.

This leaves an element of uncertainty as to what a claim actually needs to include. Is a taxpayer obliged to comply with the requirements set out in HMRC’s manuals?

The point is rendered more complicated by the assertion by Mr Rawlinson in correspondence that

“I submitted my formal request for a rebate by letter dated 20 June 2023 (bundle pages 17-24) having previously contacted HMRC on 9 June 2023 and spoken to Paul in the Liverpool office. He advised me that I simply needed to write a letter and that if I needed to file a self-assessment then HMRC would formally request me to do so.”

Accordingly, Mr Rawlinson suggests that HMRC provided positive advice to Mr Rawlinson that he make a repayment request in the form that Mr Rawlinson in fact did. It may be argued that such advice would supersede the provisions of Sch 1A TMA set out above (given the obligation to require a declaration of truth is an obligation on HMRC to require such a declaration, rather than an obligation on Mr Rawlinson to provide one).

However, Mr Rawlinson did not seek to suggest in correspondence that he had made a valid Sch 1AB claim. Instead, Mr Rawlinson argued that:

We reject Mr Rawlinson’s suggestion that HMRC’s lack of comment on further evidence provided post-hearing ought to be seen as an agreement to his substantive claim. Silence is not acceptance.

Having reviewed the relevant correspondence between the parties, we find that Mr Rawlinson’s letter was an informal request for repayment and was not (and was not intended to be) a Sch 1AB repayment request. We therefore find that there is not (at present) a formal right of appeal to this Tribunal.

We must therefore consider the most appropriate way to proceed, in circumstances where no formal right of appeal exists.

HMRC submit that the lack of a right of appeal means that this Tribunal does not have jurisdiction over the dispute. Accordingly, HMRC argue, the Tribunal has a mandatory obligation to strike out the appeal under Rule 8(2)(a) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.

HMRC cite a number of authorities, including the Upper Tribunal in HMRC v Birkett [2017] UKUT 89 (TCC), where it was held that:

“The jurisdiction of the Tribunal is wholly statutory. Unless Parliament has conferred a right of appeal against a particular HMRC decision, the Tribunal has no jurisdiction to hear an appeal”.

Mr Rawlinson argues that such an approach is unfair and simply delays matters rather than resolving the substantive dispute.

We agree with HMRC’s submission. In the absence of a right of appeal this Tribunal does not have jurisdiction and we are under a mandatory obligation to strike out the appeal.

We appreciate that Mr Rawlinson considers that this simply obliges him to make the same claim through a different route. However, the law is clear and we must strike out the appeal.

However, given that we heard full argument and submissions from the parties, we have set out our views on the substantive issue at length above. Given that we do not have jurisdiction, these views are not binding. We have nonetheless set them out in the hope that it may accelerate a final resolution of the matter between the parties.

For the reasons set out above, we strike out Mr Rawlinson’s appeal for lack of jurisdiction.

If we had jurisdiction, we would have dismissed the appeal for the reasons set out above.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.