EMI Group Electronics Ltd v Coldicott (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 22 October 1997 |
| Date | 22 October 1997 |
| Court | Chancery Division |
Chancery Division.
Neuberger J.
Michael Flesch QC and Conrad McDonell (instructed by Rowe & Maw) for EMI Group.
Launcelot Henderson QC and Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Bray (HMIT) v Best WLRTAX[1989] 1 WLR 167; [1989] BTC 102
Brumby (HMIT) v Milner WLR[1976] 1 WLR 1096
Comptroller-General of Inland Revenue v Knight ELR[1973] AC 428
Dale (HMIT) v de Soissons TAX(1950) 32 TC 118
Hamblett v Godfrey (HMIT) TAXTAXTAX(1986) 59 TC 694; [1986] BTC 143 (ChD); [1987] BTC 83 (CA)
Henry (HMIT) v Foster; Hunter (HMIT) v Dewhurst TAX(1932) 16 TC 605
Hochstrasser (HMIT) v Mayes ELR[1960] AC 376
Laidler v Perry (HMIT) ELR[1966] AC 16
Mairs (HMIT) v Haughey ELRTAX[1994] 1 AC 303; [1993] BTC 339
Shilton v Wilmshurst (HMIT) ELRTAX[1991] 1 AC 684; [1991] BTC 66
Wilcock (HMIT) v Eve TAXTAX(1994) 67 TC 223; [1994] BTC 490
Income tax - Employment - Salary in lieu of notice - Employees dismissed and paid salary in lieu of notice pursuant to contracts of employment - Whether employment was the source of payment - Whether payment emoluments "from" employment Income and Corporation Taxes Act 1988 section 19Income and Corporation Taxes Act 1988, s. 19.
This was an appeal by a company against a decision of the special commissioners that payments in lieu of notice made to two redundant employees pursuant to the terms of their contracts of employment were taxable under Sch. E.
The two employees were senior managers whose contracts of employment included a clause entitling them to salary in lieu of notice on termination of their employment. Both employees received statutory redundancy payments as well as the payments in lieu of notice, which in aggregate would be within the tax-free limit for redundancy payments under Income and Corporation Taxes Act 1988 section 188 subsec-or-para (4)s. 188(4) of the Income and Corporation Taxes Act 1988.
The special commissioners held that the payments in lieu of salary were taxable emoluments from the employment within Income and Corporation Taxes Act 1988 section 19s. 19 of the 1988 Act and therefore taxable under Sch. E. The company appealed to the High Court against determinations under reg. 49 of the Income Tax (Employments) Regulations 1993 (SI 1993/744SI 1993/744).
It was common ground that the crucial issue was whether the payments in lieu of notice were emoluments "from" the employment. The company contended that the payments in question arose not from the employment but from its disappearance, and payments for ceasing, or having ceased to be an employee were not taxable under Sch. E. Since it could not be said that the payments in lieu of notice were paid as a reward for past services they were to be treated as paid for some other reason, for instance as additional redundancy payments which they resembled.
Held, dismissing the company's appeal:
1. The payments were emoluments "from" the employment. They were due from the company to the employees under the terms of the employment contract, albeit contingently, on the termination of the employment and election by the company to make the payments in lieu of notice.
2. The payments were directly connected with the employment and were part and parcel of the employer/employee relationship. It could not be said that the termination of the employment and the election of the company to make the payments were the cause of the payment; those factors were only the occasion for the payments: Bray (HMIT) v BestTAX[1989] BTC 102 and Hamblett v Godfrey (HMIT)TAX[1987] BTC 83 followed.
3. The payments were not personal to any particular employee or dependent on a particular employee's circumstances. Similar terms as to payment in lieu of notice were included in all the contracts of the senior employees of the company. Nor could the payments (unlike redundancy payments) be said to relieve the employee from distress. The payments were simply part of the agreed machinery for determining the contract of employment; Hochstrasser (HMIT) v Mayes ELR[1960] AC 376 and Mairs (HMIT) v Haughey TAX[1994] BTC 339distinguished.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813 with effect from 1 September 1994) EMI Group Electronics Ltd (formerly known as Thorn EMI Electronics Ltd) appealed to the High Court against the following decision of the special commissioners (Mr DA Shirley and Mr Malcolm JF Palmer), released on 10 September 1996.
1. Thorn EMI Electronics Ltd (since renamed EMI Group Electronics Ltd) appeals against:
(a) a determination under reg.29 of the Income Tax (Employments) Regulations 1973 (SI 1973/334) in respect of the year 1986-87 and;
(b) a determination under SI 1993/744 section 49reg. 49 of the Income Tax (Employments) Regulations 1993 (SI 1993/744SI 1993/744) in respect of the year 1992-93.
These regulations, the latter replaces the former, apply when it appears to the inspector that there may be income tax payable by an employer which should be deducted from an employee's emoluments that has not been paid to the collector. The appeals concern payments in lieu of notice ("PILONS") made by the appellant to two former employees upon termination of their employments. The former employees concerned are Mr AGD Soames and Mr JD Hussey.
2. The appellant is a wholly-owned subsidiary of Thorn EMI plc. It was represented by Mr Michael Flesch QC and Mr Conrad McDonnell. Mr Launcelot Henderson QC appeared on behalf of the respondent inspector of taxes. No oral evidence was given, but there was put in an agreed statement of facts with supporting documents.
3. The question for determination, which we are asked to decide in principle only, is whether, in consequence of an express provision in their contracts of employment allowing for payment of the equivalent amount of salary in lieu of notice, the PILONS made to Messrs Soames and Hussey on the termination of their employments were emoluments from their employments chargeable under Income and Corporation Taxes Act 1988 section 19s. 19 of the Income and Corporation Taxes Act 1988 (formerly s. 181 of the 1970 Taxes Act) or whether they were chargeable under Income and Corporation Taxes Act 1988 section 148s. 148 of the Taxes Act 1988 (formerly s. 187 of the 1970 Act).
4. Confining ourselves to Income and Corporation Taxes Act 1988 section 19the 1988 Act, s. 19 sets out the charge to tax under Sch. E:
1. Tax under this Schedule shall be charged in respect of any office or employment on emoluments therefrom which fall under one or more than one of the following cases.
We need not rehearse Case I, which is the relevant Case in this appeal, since the nub of the question for determination is whether the PILON was an emolument "from" an office or employment. For the same reason we need not set out the definition of "emoluments" in Income and Corporation Taxes Act 1988 section 131 subsec-or-para (1)s. 131(l). Income and Corporation Taxes Act 1988 section 148Section 148 taxes under Sch. E payments not otherwise chargeable to tax on retirement or removal from office subject however to relief conferred by virtue of Income and Corporation Taxes Act 1988 section 188s. 188 which we understand would exempt most PILONS in this appeal if they do not fall within the charge imposed by Income and Corporation Taxes Act 1988 section 19s. 19.
5. Facts taken from the agreed statement of facts
Background
(2) At all material times the appellant carried on business developing and manufacturing specialised radar, electronic counter measures and command support systems with military and civil applications. The appellant had several thousand employees at various sites, and from time to time found it necessary to terminate employees' employments due to redundancy.
(3) In common with the other companies in the Thorn EMI group, the appellant's employees were classified into grades as follows. Grades 11 and below were employees below senior management level; grades MJ and MH were employees at senior management level. This "alpha grading" structure for senior management was introduced in July 1986; before that date, senior managers had grades 12, 13 or 14.
(4) Employees at grades 11 and below were employed under contracts containing the following termination provisions:
Your appointment is subject to one month's notice of termination on either side.
(5) In practice the minimum statutory notice period prescribed bys.49(1) Employment Protection (Consolidation) Act 1978 (1 week for every full year of service up to a maximum of 12 weeks) would have exceeded one month where an employee had served for 5 years or more, and this was of course recognised by the appellant (page 20 of the Employees' Guide). The employment contracts for these employees made no express provision for payments in lieu of notice.
(6) Employees at grades MJ and MH were employed under contracts which contained the following termination provisions:
NOTICE OF TERMINATION
The senior manager is required to give the company three months' notice in writing of the intention to terminate employment. The company will give its senior managers six months' notice in writing of its intention to terminate employment, except during the first six months of service, when this will be reduced to three months' notice.
The company reserves the right to make payment of the equivalent of salary in lieu of notice and to terminate employment without notice or payment in lieu for gross misconduct.
(7) Sometimes these provisions were incorporated in the contract of employment by reference to a document entitled "Statement of Main Terms and Conditions of Employment, Senior Management Staff" and sometimes these provisions were expressly included in the letter offering employment.
(8) Mr Soames and Mr...
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