Allan v Commissioners of Inland Revenue
| Jurisdiction | Scotland |
| Judgment Date | 29 September 1994 |
| Date | 29 September 1994 |
| Court | Court of Session (Inner House - Second Division) |
Court of Session (Inner House).
Lord Justice Clerk Ross, Lord McCluskey and Lord Clyde.
Colin Tyre (instructed by McGrigor Donald) for the taxpayers.
PS Hodge (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the opinion:
Brumby (HMIT) v Milner WLR[1976] 1 WLR 1096
Edwards (HMIT) v Bairstow & Anor ELR[1956] AC 14
Hamblett v Godfrey (HMIT) WLRTAX[1987] 1 WLR 357; [1987] BTC 83
Herbert v McQuade ELR[1902] 2 KB 631
Hochstrasser (HMIT) v Mayes ELR[1960] AC 376
IR Commrs v Morris SC1968 SC 153
Laidler v Perry (HMIT) ELR[1966] AC 16
Mairs (HMIT) v Haughey TAX[1993] BTC 339
Seymour v Reed (HMIT) ELR[1927] AC 554
Shilton v Wilmshurst (HMIT) ELRTAX[1991] AC 684; [1991] BTC 66
Income tax - Income and Corporation Taxes Act 1970 schedule ESch. E - Emoluments from office or employment - Supplementary payment made in addition to statutory redundancy payments - Employees subsequently retained in employment by purchaser of employing company and supplementary payments made to all employees whether remaining in employment or not - Whether character of payments had changed - Whether emoluments from employment - Income and Corporation Taxes Act 1970 section 181 section 183 subsec-or-para (1) section 187 subsec-or-para (1) section 188 subsec-or-para (3)Income and Corporation Taxes Act 1970, ss. 181, 183 (1), 187(1), 188(3)(Income and Corporation Taxes Act 1988 section 19 section 131 subsec-or-para (1) section 148 subsec-or-para (1) section 188 subsec-or-para (4)ss. 19, 131(1), 148(1), 188(4) of the 1988 Act).
These were appeals by two taxpayers, Mr Allan and the husband of Mrs Cullen. Mr Allan appealed against the decision of the general commissioners for Glasgow South and Mr Cullen appealed against the decision of the general commissioners for the Upper Ward of Renfrew. The question in both cases was whether certain payments were correctly assessed under the Income and Corporation Taxes Act 1970,Income and Corporation Taxes Act 1970 section 181 subsec-or-para (1) schedule Es. 181(1), Sch. E, for the year 1982-83.
Mr Allan and Mrs Cullen were employees of a company, which traded as clothing retailers in Edinburgh and Glasgow. In 1981 the directors of the company decided to sell the company's two valuable sites and go into voluntary liquidation. The employment of all the employees of the company was terminated by redundancy. Supplementary payments in addition to their statutory entitlements were to be made based on salary and length of service. In the event, however, it was decided to sell the shares in the company to a purchaser and the company continued to trade on a reduced scale. Before completion of the sale the shareholders approved a decision to make supplementary payments to all the employees regardless of whether they continued in employment with the new owners.
Mr Allan and Mrs Cullen continued to be employed by the company until they were eventually made redundant in 1986. Mr Allan received a lump sum payment of £11,500 and Mrs Cullen received £7,250.
The two panels of general commissioners decided that the payments in both cases constituted emoluments from the employment taxable underIncome and Corporation Taxes Act 1970 schedule ESch. E. The taxpayers argued that the general commissioners could not reasonably have decided that the payments in question were emoluments from the employment. Alternatively, if the payments in question were emoluments from the employment, then they fell within the provisions of the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 187s. 187 as payments on retirement or removal from office or employment, and since they did not exceed £25,000 they were exempt from tax by virtue of Income and Corporation Taxes Act 1970 section 188 subsec-or-para (3)s. 188(3).
It was not disputed that the payments were emoluments within the meaning of Income and Corporation Taxes Act 1970 section 183 subsec-or-para (1)s. 183(1), but it was said that they were not emoluments from the employment. Although the payments were originally intended to be supplementary redundancy payments, the taxpayers accepted that the position was altered by the fact that the company would continue to trade and the decision to make payments to all the employees whether they continued in employment or not. However, it was argued that the character of the payments had not changed.
Held, dismissing the appeals:
A payment made as a supplementary redundancy payment to employees whose services had been terminated was different in character from a payment made by the employers to all existing employees irrespective of whether or not they were made redundant. Since the payments were made to all the employees whether they lost their employment or not, the payments could not properly be regarded as compensation for anticipated loss of employment. In circumstances where the source of payment was the employer the commissioners were entitled to hold that the payments were from the employment within Income and Corporation Taxes Act 1970 section 181s. 181 of the 1970 Act. It was by virtue of their employment that the taxpayers received the payments; the payments were not made by way of gift but in return for their having acted as employees; the payments were made because of the employment and because of changes in the conditions of the employment in that the prospects of continued employment were reduced.
1. At the meeting of the commissioners for the general purposes of income tax for the division of Glasgow South held in Glasgow on 9 February 1993, Mr Robert A Allan appealed against an assessment toIncome and Corporation Taxes Act 1970 schedule ESch. Eincome tax for the year 1982-83 made on him by HM Inspector of Taxes, Glasgow 4th District in respect of his wife's and his own emoluments in the aggregate sum of £22,468.
Mrs Allan's income of £5,059 is not in dispute. Mr Allan's normal income from his employment with R W Forsyth Ltd was £5,909 and this income also is not in dispute. The balance of £11,500 relates to a payment made under a voluntary redundancy scheme and forms the subject matter of the appeal.
2. Mr Allan was present in person and was represented by his tax adviser, Mr C Young of Messrs Ernst & Young, chartered accountants, 50 George Square, Glasgow. The Revenue were represented by Mr R Quinn, HM Inspector of Taxes.
3. Shortly stated, the question for our determination was whether it was correct to include in the amount assessed the lump sum of £11,500, which was paid to Mr Allan on 19 May 1982.
4. [Paragraph 4 listed the documents produced to the general commissioners.]
5. The commissioners who heard the appeal found the following facts admitted or proved:
(a) R W Forsyth Ltd ("the company") was an old-established family concern which was incorporated in 1905 and traded as clothing retailers from two stores, one in Princes Street, Edinburgh and the other in Renfield Street, Glasgow. Mr Allan was employed at the time in question (and had been for some years previously) as a buyer of men's wear in the company's Glasgow premises.
(b) Early in 1981 it became clear to the directors and shareholders of the company that trading prospects were bleak and they decided to sell their valuable premises and go into voluntary liquidation.
(c) In August 1981 the company advised all its employees of the intention to sell both stores, that they would be made redundant but that the company would make "supplementary redundancy payments" to them, based on salary and length of service.
(d) An offer of £11.95m was received for the Princes Street property (subject to planning permission) and a decision to accept the offer was taken at the board meeting held on 7 August 1981.
(e) At the same meeting, with the approval of the shareholders, it was resolved to make supplementary redundancy payments over and above their statutory entitlements to all directors and employees whose services were terminated by redundancy. Individual payments were calculated by reference to salary and length of service at a total cost of £645,800.
(f) The Princes Street business was closed in October 1981, the staff made redundant and the property sold subject to planning permission and building consents.
(g) While seeking a buyer for the Renfield Street property the company was approached by financiers acting for property developers with a proposal to acquire the whole of the issued capital of the company, other than that held by a trust for the company's employees (known as the employees' trust) at a price of £43.36 per share. The directors of the company considered the offer to be preferable to any likely outcome of a liquidation. As part of the sale arrangements the vendors were obliged to maintain the company's trading from the Glasgow warehouse until the date of sale.
(h) On 31 December 1981 the chairman of the company wrote to shareholders inviting their approval for acceptance of the offer contrary to the earlier proposal to liquidate the company. Shareholders were informed in the penultimate paragraph of the letter "that it was proposed to include all the employees in the supplementary payments on the same basis irrespective of whether or not they are offered alternative employment by the purchaser".
(i) The company's shareholders approved the proposals and a sale agreement was drawn up and executed on 15 March 1982.
(j) The sale agreement was conditional, inter alia, upon a formal undertaking by the purchaser to procure that the company would within two months of completion of the agreement pay to persons listed in column 1 of part 4 of the schedule to the sale agreement the supplemental payments set out in column 2 of part 4 which had not been paid prior to completion.
(k) The company discontinued its pension scheme with the Scottish Equitable Life...
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