Bootle v Bye ; Wilson v Bye
| Jurisdiction | England & Wales |
| Judgment Date | 14 December 1995 |
| Date | 14 December 1995 |
| Court | Special Commissioners (UK) |
special commissioners decision
Mr Theodore Wallace.
Income tax - Emoluments of employment - Agreements between directors and non-resident company associated with employer to pay sum in return for directors continuing in employment until takeover - Whether emoluments - If so, whether emoluments consisted in contractual rights or the payments - Payments were emoluments of employment - Appeal dismissed - Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1)Income and Corporation Taxes Act 1970, s. 181(1) (Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1)Income and Corporation Taxes Act 1988, s. 19(1)).Jurisdiction - PAYE - Payment of emoluments by third party non-resident company - Whether employees assessable to tax which employer should have deducted - Whether non-resident company had sufficient "tax presence" for PAYE to apply - The non-resident company paying deemed employees in the UK was not within the PAYE scheme - Appeal dismissed - Taxes Management Act 1970 section 29 section 31 section 50Taxes Management Act 1970, ss. 29, 31, 50;Income and Corporation Taxes Act 1988 section 204Income and Corporation Taxes Act 1988, s. 204; SI 1993/744 section 40 section 101 subsec-or-para (1)Income Tax (Employments)Regulations 1973, regs. 26, 49.
1. These appeals concern the tax treatment of payments made to two directors by a U.S. company associated with their employer. The payments were under agreements made in contemplation of a sale of the company and were dependent on the directors continuing in employment until any sale.
2. Four issues arise:
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(a) Whether the agreements gave rise to emoluments;
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(b) If the agreements did give rise to emoluments, were the emoluments the rights under the agreements or the sums received pursuant thereto;
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(c) Assuming that the Appellants did receive emoluments, whether the Special Commissioners have jurisdiction to consider whether the payer of the emolument should have accounted for tax under PAYE;
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(d) If there is such jurisdiction, whether the paying company was outside the territorial scope of PAYE.
3. The parties agreed a statement of facts in the following terms:
1. Mr Bootle and Mr Wilson (the "taxpayers") were directors and full time employees of Safeway Food Stores Limited ("Safeway Food Stores") a company registered in England and resident in the United Kingdom. Mr Bootle became an employee on 18 April 1966 and was appointed a director on 21 December 1981 and Mr Wilson became an employee on 19 September 1977 and was appointed as a director on 8 December 1977. On 11 July 1986 both Mr Bootle and Mr Wilson entered into written five year contracts of service with Safeway Food Stores under which their annual salaries at that date were respectively £42,000 and £43,000. In 1985/86 and 1986/87, the taxpayers received remuneration from Safeway Food Stores. This remuneration was received after deduction of tax in accordance with the PAYE regulations in force at the time.
2. In 1985/86 a predator company began moves to acquire Safeway Stores Incorporated ("Stores"), the ultimate parent of Safeway Food Stores. Stores Inc is a company incorporated in Maryland in the United States of America.
3. During 1986 in an attempt to protect the group from a hostile take-over, the group was restructured by a process of leveraged buyout with the assistance of a firm of American financiers Kohlberg Kravis Roberts and Co ("KKR").
4. On 25 July 1986 the US Board of Stores recommended to shareholders to accept the restructuring proposal organised by KKR. Consequently, there were various changes to the group structure in the US during the autumn of 1986.
5. In order to achieve the restructuring KKR had arranged for very substantial borrowings by Stores. In order to reduce these borrowings, it was decided to raise funds by disposing of various assets as soon as practicable. There was considerable discussion in the press about which group assets could be sold. Commentators identified Safeway Food Stores as likely to be sold.
6. KKR sought buyers for Safeway Food Stores and appointed Morgan Stanley to arrange a sale in about October or November 1986. A number of parties expressed interest. Morgan Grenfell were instructed at the same time to investigate the possibility of floating the UK group on the Stock Market. It was announced in the Press that the UK business was up for sale in November 1986.
7. During this period the directors of Safeway Food Stores were concerned about their position should Safeway Food Stores be sold to a third party.
8. Agreements were drawn up and were signed on 17 December 1986. Individual agreements were signed between various employees of Safeway Food Stores namely, the taxpayers, Mr Spratt, and five others and SSI UK Holdings Inc ("SSI"). Each of the agreements was in the same form save as to the formula for the calculation of the amount which was potentially payable.
9. SSI would not have entered into the respective agreements with the taxpayers and the other individuals mentioned in paragraph 8 above had they not respectively been employees and/or directors of Safeway Food Stores.
10. SSI is a company incorporated in Delaware. It was a member of the group of companies of which Safeway Food Stores was a part but was not its parent. At the material times it was not resident in the UK nor trading in the UK through any branch or agency and was unknown to the Inland Revenue. It had no tax presence in the UK save to the extent that (as contended by the taxpayers but disputed by the Inland Revenue) the payments made under the agreements referred to in Paragraph 8 above gave rise to such a presence.
11. Safeway Food Stores was sold to the Argyll Group plc by means of an agreement on or around 23 January 1987.
12. Following the acquisition by the Argyll Group plc payments were made by SSI in February 1987 to the taxpayers in accordance with the terms of the agreements of 17 December 1986. The payments were effected by transfer into the taxpayers' bank accounts. It is agreed that the payments were made in satisfaction of the taxpayers' respective rights under the agreements of 17 December 1986.
13. Mr Bootle received £176,790 and Mr Wilson received £175,605 under the terms of the agreements of 17 December 1986. Nothing was deducted from these amounts on account of PAYE. These sums have been assessed to income tax under Schedule E for tax year 1986/87. The taxpayers have appealed against these assessments.
14. Mr Bootle resigned as a director and employee of Safeway Food Stores on 22 December 1988, though he continued in employment engaged in the trade previously carried on by Safeway Food Stores, until he retired on 28 July 1994. Mr Wilson resigned as a director and employee of Safeway Food Stores on 31 December 1987.
4. The agreed bundle of documents included the two agreements of 11 July 1986; a letter from Latham & Watkins, attorneys at law, to Mr T E Spratt, chairman of Safeway Food Stores, dated 7 November 1986; the two agreements dated 17 December 1986; tax returns, notices of assessment and sundry correspondence between the parties.
5. The agreements of 11 July 1986 covered a term of five years and provided for the director to devote the whole of his time during business hours to other duties. Clause 4(A) provided that during the employment the director should not be concerned in any other business without written consent. Clause 4(B) restrained the director from competing with Safeway Food Stores for two years from termination of the employment either on his own account or with or for any other person. Clause 5 was designed to protect trade secrets and confidentiality.
6. Clause 6 covered remuneration. There was a fixed salary of £42,000 in the case of Mr Bootle and £43,000 in the case of Mr Wilson to be reviewed annually. The director was to participate in the profit related bonus plan limited to 25 per cent of salary. There was the usual package of additional benefits including a pension, car and medical and disability insurance.
7. The agreement dated 17 December 1986 between SSI and Mr Bootle was as follows:
AGREEMENT
THIS AGREEMENT is made and entered into as of December 17 1986 (the "Agreement") by and between SSI U.K. HOLDINGS, INC., a Delaware corporation (the "Company"), and David Bootle (the "Executive").
RECITALS:
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A. The Executive has been associated with the Company's operations in the United Kingdom ("Safeway U.K.") for an extended period (these operations being the supermarket business presently carried on by Safeway Food Stores Limited and its subsidiaries), and the Company considers his continued association with Safeway U.K. to be valuable to the future success of Safeway U.K.
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B. The executive possesses an intimate knowledge of the business and affairs of Safeway U.K.
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C. The Company recognizes that the possibility of a change in control (as hereinafter defined) of Safeway U.K. exists and that such possibility, and the uncertainty and questions which it raises with the Executive, may result in the departure or distraction of the Executive to the detriment of Safeway U.K. and the Company.
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D. The Company has determined that it is in the best interests of the Company and Safeway U.K. to foster and encourage the continued attention and dedication of the Executive to his assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a change in control of Safeway U.K.
NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
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