Executors of Clark (Deceased)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 June 2019 |
| Neutral Citation | [2019] UKFTT 473 (TC) |
| Date | 20 June 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 473 (TC)
Judge Anne Scott
Mr Andrew Thornhill, QC, appeared for the appellant
Mr Ross Anderson, Advocate, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Termination payment or relevant benefit under EFRBS – Disability – Entire agreement clause – Extrinsic evidence – Late amendment of grounds of appeal – No – Appeal dismissed.
The First-tier Tribunal (FTT) held that a payment was a lump sum and was a commutation of the income based pension which was paid to Mr Clark on his retirement. It was therefore properly taxable as a relevant benefit under an Employment-Financed Retirement Benefits Scheme (EFRBS) under s. 393B(1), ITEPA 2003.
Mr Clark was one of three founders of Walter Scott & Partners Ltd (the company) which was sold in 2006. He had been employed as Investment Director since 1 January 1983 and remained with the company after the sale until he retired. He retired as Executive Director in 2009 and was a Non-executive Director until February 2013.
A Settlement Agreement was entered into by Mr Clark, his wife and the company in December 2013. The company agreed to pay Mr Clark £18m less salary payments and revenue related remuneration due or paid in respect of the 2013 calendar year.
The appellants sought repayment of tax deducted under PAYE on two alternative bases:
- If the payment fell within s. 401, ITEPA 2003, £3,595,000 was exempt under s. 406, ITEPA 2003 as representing that part of the termination payment that was made on account of Mr Clark's disability.
- The entire payment was made in return for the surrender of pension rights and thus fell outside s. 401, ITEPA 2003 as it was not made in connection with Mr Clark's employment. It fell outside s. 394, ITEPA 2003 as it did not constitute relevant benefits within the meaning of s. 393. Accordingly, the whole amount of the tax deducted, £7,052,720 was repayable.
HMRC contended that the appeal should be refused because the payment was an amount which counted as employment income in that:
- There was no evidence that any part of the payment was provided on account of disability in terms of s. 406; and
- The Settlement Agreement was itself an EFRBS under s. 393A and the payment was a lump sum made under an EFRBS under s. 393B(1).
Mr Clark died in February 2015 but the FTT held that there was no evidence as to whether this was linked to his disability. There was little information about his disability and its functional impact. In 2013, a Consultant Neurologist found that his mind was “as sharp as a tack” and he was able to cope with complex issues although he had significant physical restrictions. Mr Clark had continued to work whilst unwell and he was remunerated on the same basis as previously. The medical evidence was not that he had to retire and it did not suggest that this was the driver for the Settlement Agreement.
The FTT found that, in reality, the Settlement Agreement related only to a payment to buy out the rights of Mr Clark and his wife and to reflect compensation for loss of employment and compromising all other claims set out in that Agreement. It held that the Settlement Agreement was an EFRBS under s. 393A(4), ITEPA 2003 and the payment was a relevant benefit as it was in respect of a commutation of the income based pension rights into a lump sum.
The FTT disagreed with the appellants that the payment was a surrender rather than a commutation of pension rights, that the surrender was at a loss because it was less than market value and it could not therefore be a benefit.
The FTT held there was no loss to Mr Clark or any reduction in his rights as a result of entering into a Settlement Agreement. Indeed, it held that from the evidence the computation of the payment was generous in that no account was taken of his disability and the figures used were rounded up.
Dismissing the appeal, the FTT found that the payment was a lump sum and was a commutation of the income based pension which was paid to Mr Clark on his retirement. It was therefore properly taxable as a relevant benefit under an EFRBS.
In the Closing Submissions, the appellants had sought leave to amend the grounds of appeal to look at the question of Mrs Clark's pension surrender. The FTT refused on the basis that “it was far too little and far too late”. The appellant's intimated that they would appeal that case management decision.
An EFRBS is a scheme for the provision of benefits consisting of, or including, relevant benefits to, or in respect of, employees or former employees (s. 393A(1), ITEPA 2003). As such, the benefits provided will potentially be taxable under these rules if they come within the definition of “relevant benefits” given in s. 393B, ITEPA 2003. In this decision, the FTT decided that the Settlement Agreement was an EFRBS and the payment was a lump-sum payment made under that EFRB.
[1] The appeal relates to a Closure Notice issued by the respondents (“HMRC”) on 1 July 2016 under section 28A(1) and (2) of the Taxes Management Act 1970 (“TMA”) whereby HMRC concluded an enquiry opened into the 2013/14 self-assessment tax return of the late Ian John Clark brought under section 9A TMA. The appeal is brought by Mr Clark's executors.
[2] The Closure Notice refused the appellants' claim for relief under section 406 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and amended the self-assessment tax return increasing the self-assessment by £7,054,025.65 from an overpayment of £7,052,720.65 to an underpayment of £1,305.20.
[3] On 27 December 2013, what was described in Mr Clark's self-assessment tax return for 2013/14 as “Termination Payment 31 December 2013 – £15,705,613” had been remitted to him under deduction of PAYE (“the Payment”). In fact, the total consideration paid to him under a Settlement Agreement was £18 million but there is no dispute about the tax treatment of £2,294,387 which was received as salary and revenue related income to 31 December 2013.
[4] Mr Clark has been fully remunerated for the services that he has carried out for his employer and there is no suggestion by either party that the Payment had been made to compensate him for past services. Equally there is no suggestion that the Payment was made in respect of future services.
[5] The dispute between the parties is limited to which provisions of Part 6 of ITEPA apply to the Payment.
[6] HMRC have conceded that, because prior clearance for PAYE purposes was granted on the basis that the Payment was taxable under section 401 ITEPA (which includes the £30,000 exemption under section 403 ITEPA), if they are successful in arguing that section 401 is not applicable, then nevertheless the first £30,000 of the Payment does not fall to be assessed.
[7] The appeal was lodged late but HMRC have not objected and I therefore formally extend the time for lodging a Notice of Appeal.
[8] In the Notice of Appeal the appellants sought repayment of tax deducted under PAYE on two alternative bases:
- If the payment falls within section 401 ITEPA (section 401), £3,595,000 is exempt in terms of section 406 ITEPA (section 406) as representing that part of the termination payment that was made on account of Mr Clark's disability. A repayment is therefore due in respect thereof.
- The entire payment was made in return for the surrender of pension rights and thus it falls outside section 401 since it was not made in connection with Mr Clark's employment. It falls outside section 394 ITEPA (section 394) as it does not constitute relevant benefits within the meaning of section 393 ITEPA (section 393). Accordingly the whole amount of the tax deducted, £7,052,720 is repayable.
[9] The appellants' Skeleton Argument (described as a Statement of Case) dated 15 May 2018 stated: “Admittedly, there was here a scheme to provide “relevant benefits”. However, the relevant payment was not a benefit provided under a scheme (see s.393 (1). It was a payment for giving up benefits and as such not liable to income tax or capital gains (TCGA s.144 (a))”.
[10] The argument on section 144 was not pursued in Closing Submissions at the hearing and Mr Thornhill argued then that section 393 was relevant and not section 401. He then changed his mind and also advanced arguments on section 401. Since the legislation fell to be considered in any event, I listened to all arguments on its applicability.
[11] That Skeleton Argument stated at paragraph 3:
The first task facing the Tribunal is to apportion the sum paid between (a) termination of employment, and (b) surrender of pension rights first on the part of Mr Clark and second of Mrs Clark.
at paragraph 4:
It is submitted that whatever sum is attributed to Mr Clark's loss of earnings falls within s.406 for the simple reason that it was his illness (disability) which occasioned the termination.
and at paragraph 5:
5. The balance relates to the loss of pension rights. Some part of those rights must relate to Mrs Clark. She is not a party to this appeal and accordingly that part should be taxed, if at all, on her and not Mr Clark. The evidence of Mr Bartlet will assist the Tribunal to quantify what sum is attributable to the surrender of Mrs Clark's pension.
[12] On the first day of the hearing I asked Mr Thornhill if he wished to amend his Grounds of Appeal since he had not applied to expand or alter the Grounds of Appeal and no argument had previously been advanced in relation to Mrs Clark. He declined.
[13] In his response to Mr Anderson's Reply to his Closing Submissions, Mr Thornhill applied for leave to amend the Grounds of Appeal and then to recall Mr Bartlet to give further evidence. Understandably, Mr Anderson vigorously objected. Both applications were refused. The detail is set out in the Footnote to the Decision.
[14] HMRC contend that the appeal should be refused because the...
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