Kuehne + Nagel Drinks Logistics Ltd and Others v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 21 December 2010 |
| Neutral Citation | [2010] UKUT 457 (TCC) |
| Date | 21 December 2010 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2010] UKUT 457 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Newey J.
Jolyon Maugham (instructed by Crowe Clark Whitehill LLP) for the appellants.
Ingrid Simler QC (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following cases were referred to in the judgment:
Attorney-General v London County CouncilTAX (1900) 4 TC 265
Bird v MartlandTAX [1982] BTC 259
Brumby v MilnerTAX (1976) 51 TC 583
Hamblett v GodfreyTAXTAX [1987] BTC 83; 59 TC 694
Henley v MurrayTAX (1950) 31 TC 351
Hochstrasser v MayesELRTAX [1960] AC 376; (1959) 38 TC 673
Laidler v PerryELRTAX [1960] AC 16; (1965) 42 TC 351
Mairs v HaugheyTAXTAX [1993] BTC 339; 66 TC 273
PA Holdings Ltd v R & C CommrsTAX [2010] BTC 1,626
Shilton v WilmshurstTAXELR [1991] BTC 66; [1991] 1 AC 684
Tilley v WalesELR [1943] AC 386
Income tax - National Insurance contributions - Emoluments from employment - Remuneration or profit derived from an employment - Payments made on TUPE transfer to recognise loss of pension scheme benefits and avoid industrial action - Whether payments "from employment" - Whether payments capital - Whether TUPE transfer meant payments derived from cessation of employment - Taxayers' appeals dismissed - Income Tax (Earnings and Pensions) Act 2003, Income Tax (Earnings and Pensions) Act 2003 section 9 section 62ss. 9, 62 - Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) - Social Security Contributions and Benefits Act 1992, Social Security Benefits and Contributions Benefits Act 1992 section 6s. 6.
This was an appeal by the taxpayers from the decision of the First-tier Tribunal (FTT) ([2009] UKFTT 379 (TC); [2009] TC 00314) that certain payments were subject to tax and National Insurance contributions on the basis that they were earnings from employment within the meaning of s. 9 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and derived from employment for the purposes of s. 6 of the Social Security Contributions and Benefits Act 1992.
In 2006 Scottish & Newcastle transferred its drinks distribution business to the taxpayer company as part of a joint venture. Some 2,000 employees, including the individual taxpayers, were transferred to the taxpayer company. The employees were concerned that the taxpayer company's pension scheme was less good than that of Scottish & Newcastle. Industrial action was threatened in relation to the pensions position. It was agreed that Scottish & Newcastle would fund payments totalling £5,000 per employee. £200 of that £5,000 represented compensation for loss of a beer allowance. It was common ground that that £200 was taxable. The dispute related to the balance of the £5,000 payments. On appeal by the taxpayers, the First-tier Tribunal held that the payments were taxable as derived from employment. The FTT concluded on the facts that the payments were made and received both in order to compensate for loss of pension expectations and to avoid industrial action and ensure a smooth transfer, and that those two factors were not dissociable.
The FTT held that there was no difference between a payment being from an employment under s. 9 of ITEPA and its being derived from an employment under the 1992 Act. It therefore concluded that the test to be applied for NICs was identical to that under s. 9 of ITEPA, and there was no appeal on that point. Thus the question on appeal to the Upper Tribunal was whether the payment was from the relevant employment, within the meaning of s. 9 of ITEPA.
The taxpayers submitted that the question that the statute required to be answered was what the payment was from, not why it was made, and that the employee's standpoint was key. The FTT had not provided an answer to the question what the payment was from. As a matter of law, a payment could not be from two things at once. If that was wrong and a payment could be from more than one thing, the two things had to be weighed up if one was taxable and the other was not. Furthermore the FTT had been wrong to take the view that there was no need to distinguish between capital and income: a capital payment could not be taxable.
Held, dismissing the appeals:
1. To be taxable under ITEPA, s. 9, a payment must have been received "from" an employment. In determining whether a payment was "from" an employment, the fact that an employee would not have received a payment but for his employment was not necessarily decisive. On the other hand, a payment need not have been made in return for services to be taxable. The only statutory question was whether the emolument came from employment. Answering that question was not to be constrained by the mechanistic application of statements found in the case law. (Hochstrasser (HMIT) v Mayes [1960] AC 376; 38 TC 673, Hamblett v Godfrey (HMIT) [1987] BTC 83 and PA Holdings Ltd v R & C Commrs [2010] BTC 1626 considered.)
2. The judge could not be criticised for focusing on why the payments totalling £5,000 had been made. He was entitled to take the view that the causes and reasons for the payments were key to determining whether they were "from" employment. There was no principle that the standpoint of the recipient was the sole or even the predominant standpoint from which the payment had to be viewed. In any event, the judge concluded that it was the understanding of all parties' that the payments were made both to compensate for loss of pension expectations and to ensure a smooth transfer. He also said that it could not be said either from the employees' or employers' perspective that the only reason the payments were made was in compensation for the pension changes. It thus made no difference whose standpoint was adopted as the employees and the employer saw things in the same way.
3. The ultimate question always had to be whether a payment was "from" the employment. In deciding that question, the tribunal might have to consider more than one possible cause of a payment. The difficulty which arose in the present case was that the judge did not regard it as possible either to identify a predominant cause or to characterise a cause as merely a precursor. He concluded that the payments were attributable to two factors which were not dissociable. In such circumstances, a payment was to be regarded as "from" employment even though it might also be said to be "from" something else. Further, the legislation did not exclude the possibility of a payment being from something else as well as employment, even if a single "from" could be identified in most cases. Where, as in the present case, a judge decided that it was impossible to separate or rank causes, there could be no basis for deciding that a payment was to be attributed to a non-taxable one as opposed to a taxable one. He was entitled to take the view that, in the present case, the payments were made because of the loss of pension rights and expectations and to ensure willing work without industrial action. (Henley v Murray (HMIT) (1950) 31 TC 351 considered.)
4. On the judge's findings of fact, the payments were made both to compensate for loss of pension expectations and to ensure a smooth transfer. In those circumstances, the so-called replacement principle could not be invoked to attribute the payments to only one of those elements. (Wales v Tilley (1945) 25 TC 136, Bird (HMIT) v Martland [1982] BTC 259 and Mairs (HMIT) v Haughey [1993] BTC 339 distinguished.)
5. As regards the taxpayers' submission that the judge had failed to distinguish between capital and income, the right approach was to use the words of the statute, namely ITEPA, s. 62(2) which defined earnings. The fact that a payment had characteristics of capital might mean that the payment did not fall within that definition and, hence, that it was not taxable. If, on the other hand, the definition extended to the payment in question, the payment would be taxable regardless of whether it might in other contexts be regarded as capital rather than income. That was probably why lump sum payments had been held to be taxable. It was presumably also why the £200 payments made in the present case for loss of the beer allowance were accepted to be taxable. The taxpayers had accepted that the £5,000 payments came within the definition of earnings given in ITEPA, s. 62(2) and it followed that they could not escape taxation as being capital. They were to be regarded in that respect in the same way as the £200 beer allowance payments. (Hamblett v Godfrey [1986] BTC 83 and Shilton v Wilmshurst [1991] BTC 66 considered.)
1. These appeals are concerned with whether certain payments made to Mr Stott and Mr Joyce are liable to tax and national insurance contributions ("NICs").
2. Mr Stott and Mr Joyce were formerly employees of Scottish & Newcastle UK Limited ("Scottish & Newcastle"), but in 2006 Scottish & Newcastle transferred its drinks distribution business, and, with it, Mr Stott, Mr Joyce and many other employees, to Kuehne + Nagel Drinks Logistics Limited ("KNDL") as part of a joint venture. The payments at issue were made to Mr Stott and Mr Joyce by KNDL, but they were funded by Scottish & Newcastle.
3. The First-tier Tribunal (Judge Charles Hellier [2009] UKFTT 379 (TC); [2009] TC 00314) held that the payments were subject to tax and NICs. This was on the basis that the payments were earnings "from" employment within the meaning of Income Tax (Earnings and Pensions) Act 2003 section 9section 9 of the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA") and "derived from" employment for the purposes of Social Security Benefits and Contributions Benefits Act 1992 section 6section 6 of the Social Security Contributions and Benefits Act 1992.
4. Mr Stott and Mr Joyce both appeal against Judge Hellier's decision, as does KNDL. The proceedings represent a test case. They are intended to determine the tax and NIC...
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