Kuehne + Nagel Drinks Logistics Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 December 2009 |
| Neutral Citation | [2009] UKFTT 379 (TC) |
| Date | 17 December 2009 |
| Court | First Tier Tribunal (Tax Chamber) |
[2009] UKFTT 379 (TC)
Charles Hellier (Chairman)
Jolyon Maughan and Mr M Ripley, instructed by Howarth Clark Whitehill LLP, for the Appellants
Ingrid Simler QC, instructed by the Solicitor to HM Revenue and Customs for the Respondents
Income tax - earnings from employment - whether payment made on TUPE transfer to recognise loss of pension scheme benefits but also to avoid industrial action was "from employment" - whether capital payments could not come from employment - whether TUPE meant that for ITEPA purposes there was no change in employment - held, taxable NIC - earnings derived from employment - whether same meaning as "from employment"
Payments made to employees on the transfer of a business to recognise a loss of pension scheme benefits and also to avoid industrial action were "from employment" and liable to income tax under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 9 subsec-or-para 1s. 9(1) and the company to which the business was transferred was liable to pay National Insurance contributions (NICs) in respect of those payments under Social Security Benefits and Contributions Benefits Act 1992 section 6 subsec-or-para 1s. 6(1)(a) of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992).
In 2006 a drinks distribution business was transferred to the taxpayer company which was a joint venture vehicle. The transfer of the business was a relevant transfer for the purpose of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) (SI 2006/246). The effect of TUPE was that, with certain exceptions, the 2,000 transferring employees of the distribution business would acquire rights against the taxpayer which were the same as those they had before the transfer against the transferor. One of those exceptions was in relation to the future accrual of pension rights. During the consultations with the union and others prior to the transfer it became apparent that the employees were seriously concerned because they considered that the taxpayer's pension scheme was not as generous as the transferor's scheme. Industrial action was considered. Eventually it was agreed that payments of £3,000 (immediately) and £2,000 (a year later) would be made to the transferring employees.
The second and third taxpayers were two of the employees in question. HMRC amended their self-assessment returns on the basis that the payments they received were earnings from employment, and decided that the taxpayer company was liable to pay NICs on those payments. The taxpayers appealed.
Whether the payments were liable to income tax as "emoluments from" employment; and whether the first taxpayer was liable to pay NICs as the payments were "remuneration or profit derived from an employment".
The First-tier Tribunal (Charles Hellier) (dismissing the appeals) said that the TUPE regulations were the legal background to the transfer of the distribution undertaking. Once the business was transferred to the first taxpayer the employees had little choice: their contracts of employment were automatically transferred unless they objected. But if they objected their employment terminated without compensatory rights. So generally they had to transfer. On transfer they kept almost all their previously accrued rights apart from their rights to accrue extra pension under the transferor's scheme. However the regulations did not have any effect in relation to, or in relation to the operation of ITEPA 2003. For the purpose of this decision, in deciding whether the payment came from employment, so far as was relevant the tribunal would treat the employees as first employed by the transferor and then by the taxpayer company. As a consequence the payment was made in connection with that change of employment. As a matter of principle and authority a lump sum payment or capital receipt could be taxable as employment income under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 62s. 62.
The question of taxability where a payment was made for two reasons which were not dissociable was answered by the statutory words. If it could be said that such a payment came from the employment then it was taxable even if the payment could also fairly be said also to come from something else or also be made for a second reason. The question was whether the receipt had the taxable quality of remuneration, i.e. came from the employment (Brumby (HMIT) v MilnerTAX(1976) 51 TC 583 and Shilton v Wilmshurst (HMIT)TAX[1991] BTC 66 considered.)
The payments did not come from the cessation of employment. It was true that without the cessation there would have been no payment but to be a causa sine qua non was not enough to make a payment from employment. The cessation of employment was the trigger for the payments but they were made because of the loss of pension rights and expectations and to ensure willing work without industrial action. The threat of strike action was not merely the means by which the payment was secured; it was a substantial cause of the payment. On that basis, the payment was taxable. Because it was paid and received as an incentive to work willingly and without industrial action for the joint venture company, it was an emolument from the employment. That it was also paid and received as compensation for the loss of the pension scheme did not affect that conclusion. It was paid in reference to the services the employees rendered and was in the nature of a reward or inducement for future willing service (Mairs (HMIT) v HaugheyTAX[1993] BTC 339; 66 TC 273, Hamblett v Godfrey (HMIT)TAX[1987] BTC 83 and Laidler v Perry (HMIT)TAX(1965) 42 TC 351 considered).
As regards NI payments, SSCBA 1992, Social Security Benefits and Contributions Benefits Act 1992 section 3 subsec-or-para 1s. 3(1) provided that "earnings" included any remuneration or profit derived from an employment; and "earner" should be construed accordingly. Social Security Benefits and Contributions Benefits Act 1992 section 6Section 6 of SSCBA 1992 provided for primary and secondary Class 1 contributions on earnings paid to or for the benefit of an earner. In the statutory contexts there was no difference between a payment being "from" an employment and its being "derived from" an employment. Each expression asked what the source of the payment was or where it came from. Wherever judges used "from" in judgments relating to that issue the words "derived from" could have been substituted without any difference in meaning. Accordingly, the test to be applied for NICs was identical to that relevant to the employment income charge.
Finally, the change in the employer was not a change in the nature of service. Since there was no change in the nature of service, the payment was not made "in connection with" such a change (however broadly those words should be construed) and accordingly the payment was not a relevant benefit for the purposes of ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 393B section 394ss. 393B and 394.
1. These appeals relate to payments made by Kuehne + Nagel Drinks Logistics Ltd ("KNDL") to certain employees in connection with their transfer of employment from Scottish & Newcastle UK Limited ("S&N") to KNDL. Mr Stott and Mr Joyce were two of those employees.
2. HMRC amended the self assessment returns of Mr Stott and Mr Joyce on the basis that the payments they received were earnings from employment, and decided that KNDL was liable to pay National Insurance Contributions (NICs) on these payments.
3. Mr Stott and Mr Joyce appeal against the amendments to their self assessment returns and KNDL appeals against the notice of the decision in respect of the NICs.
4. In 2006 S&N transferred its drinks distribution business to KNDL, a company which was the vehicle for a distribution business joint venture between S&N and Kuehne + Nagel. The transfer of the business was a relevant transfer for the purpose of the Transfer of Undertakings (Protection of Employment) Regulations 2006, (TUPE). The effect of TUPE was that, with certain exceptions, the 2,000 transferring employees of the distribution business would acquire rights against KNDL which were the same as those they had before the transfer against S&N. One of those exceptions was in relation to the future accrual of pension rights. During the consultations with the union and others prior to the transfer it became apparent that the employees were seriously concerned because they considered that the KNDL pension scheme was not as generous as the S&N scheme. Industrial action was considered. Eventually it was agreed that payments of £3,000 (immediately) and £2,000 (a year later) would be made to the transferring employees. The payments were agreed and the transfer went ahead smoothly in July 2006. The payments were made.
5. The payments are liable to income tax if they are "emoluments from" employment, and KNDL is liable to pay NICs if they are "remuneration or profit derived from an employment".
6. I heard oral evidence from (i) Andrew John Swift, a drayman driver in the distribution business and a shop steward for the T&GWU. Mr Swift was a member of the Employee Council and had taken part in the meetings of the TUPE consultation group, and (ii) Andrew Ivel, who at the time of the transfer of the distribution business was Employee Relations manager for S&N and had taken part in the TUPE consultation meetings. At those meetings Mr Ivel had led for S&N the negotiation which resulted in the payments to the transferring employees. Both Mr Swift and Mr Ivel provided written statements. Unless expressly noted below where I set out Mr Smith's or Mr Ivel's evidence I accept it. There was also a short statement of agreed facts and two bundles of copy documents which included minutes of the Employee Council and TUPE meetings.
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