McAllister
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 June 2021 |
| Neutral Citation | [2021] UKFTT 232 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 232 (TC)
Judge Marily McKeever
Mr John McVeigh, accountant, appeared for the appellant
Mr Joshua Carey, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Employee contractually entitled to ICT allowance – Allowance created equal pay issues for employer – Lump sum payment made to employee for giving up right to ICT allowance – Whether an emolument of the employment within ITEPA 2003, s. 62 – Yes – Appeal dismissed.
The FTT dismissed the taxpayer's appeal against HMRC's ruling that a lump sum payment made by the employer to buy-out the employee's contractual right to an ongoing ICT allowance was earnings.
Mr McAllister was employed by the Commission of the Northern Ireland Assembly (NIA) as an application development analyst and received a lump sum of £44,860 in return for giving up his right to an ICT allowance of £5,630 per annum. The allowance had been to reflect the skills and competencies required by staff employed in the ICT discipline.
In 2010, a regrading exercise had been undertaken on behalf of the NIA, which recommended the introduction new pay grades and bands to take account of specialist skills and obviate the need for additional allowances. However, those already receiving the allowances continued to do so and Mr McAllister was one of these.
In 2011 and 2013, the employer conducted equal pay reviews and became concerned that as the majority of employees still receiving the allowance were male, a potential risk of challenge on grounds of sex discrimination existed. Accordingly, the employer negotiated with the relevant union (NIPSA) and subsequently paid lump sum compensation payments in return for the employees' agreement to a change in the terms of employment which removed the ICT allowance. This was made explicit in a memo from the Human Resources department which described the payment as “a compensation payment to buy-out your ICT allowance”. The lump sums were paid subject to PAYE and National insurance contributions.
Mr McAllister argued that the payment should not have been taxed and claimed a refund via his self assessment tax return. The refund was initially paid, but shortly after, HMRC opened an enquiry into the return and later issued a closure notice confirming HMRC's view that the payment was taxable. Mr McAllister appealed against the closure notice.
Mr McAllister contended that the payment was not an emolument of the employment because:
- it was paid by the employer simply to avoid an equal pay risk and was therefore not linked to the employment – it was for some other reason
- there was no requirement to remain in the employment after receiving the payment so it was therefore not an inducement to enter into or remain within employment
- it was not in return for any service past, present or future
- it was ex gratia and the only condition was surrender of the ICT allowance
In response, HMRC argued that the lump sum represented the future payments of the ICT allowance foregone, which would otherwise have formed part of Mr McAllister's salary. In addition, that it was paid as motivation for the employees to continue providing their services and so was “from” the employment.
The arguments essentially fell into two categories: whether the payment was “from” the employment and if so, whether it was an “emolument” of that employment. The FTT considered a number of cases for authority in arriving at its conclusion and we summarize a selection of the principal authorities here.
In Dewhurst v Hunter [1932] All ER Rep 753, a payment to release the employer from a contingent liability (termination of employment) was held not to be “from” the employment. However, in the current case, the payment did not relate to a contingent liability but to an existing and ongoing contractual entitlement and so Dewhurst was not considered to be persuasive.
In Hamblett v Godfrey [1987] 1 WLR 357, it was determined that a payment can be an emolument “from” the employment where it is made in return for changes in the conditions of employment. There is no requirement that the payment has to directly represent any earnings or allowances which might have arisen in the future; it is sufficient that the employee receives a payment for giving up rights arising out of the employment relationship.
Consequently, the FTT held that the payment for release of the employer's obligation was clearly “from” the employment in this case.
The legislation in relation defining earnings is section 62, Income Tax (Earnings and Pensions) Act 2003 which is broad in scope:
- This section explains what is meant by earnings in the employment income Parts.
- In those Parts earnings, in relation to an employment, means–any salary, wages or fee,any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth, oranything else that constitutes an emolument of the employment.
Arguably, the compensation paid to Mr McAllister could potentially have fallen within either 62(2)(b) or (c) but the FTT did not consider this in detail, presumably because anything not already caught by (b) could still fall into the “safety net” of (c) and thus come within the overall description of “earnings”, hence the point was not critical to the outcome of the appeal.
In Holland v Geoghegan [1972] 3 All ER 333, it was made clear that there is no need for any obligation on the employee to remain in the employment for it to be an emolument of that employment, and that it was sufficient that it was made in substitution for a taxable part of an employee's pay.
The requirement (or not) for the employee to remain in the employment was also considered in Cameron v Prendergast [1940] AC 549, in which a director who wished to resign, accepted a payment for agreeing not to resign, albeit on a reduced future salary. Mr Cameron was not required to remain in office for any specified period. The court found that agreeing not to resign must therefore involve an agreement to continue and the payment was a profit from the directorship and subject to income tax.
Similarly, in Tilley v Wales [1943] AC 386, a payment in return for accepting a reduced future salary was held to be taxable even though there was no particular period in which Mr Tilley should continue in the employment. Again, the court in that case decided that as any future salary would clearly have been taxable, a payment made in compensation for the reduction of that salary must represent profit from the employment and thus be taxable.
This has come to be known as the “replacement principle”; in deciding upon the nature of a compensation payment it is relevant to consider the nature of the payment which is being replaced. If the payment being given up would have been taxable, then so is the replacement. Conversely, if the payment being given up would not have been taxable, neither is the replacement.
The replacement principle has been stated in a number of cases in addition to those already mentioned. In Mairs (HMIT) v Haughey [1993] BTC 339, the employee was given compensation for the withdrawal of an enhanced redundancy payments scheme. The amount directly attributable to those lost contingent rights (which would not have been taxable had the contingency, i.e. redundancy, arisen) was held not to be taxable, as it was effectively a payment for a loss.
In Bolam v Muller [1947] 28 TC 471, a director surrendered his right to commission in return for a lump sum payment, which was held to be remuneration. In that judgement, Atkinson J said:
It is obvious, of course, that the bonuses he would have received if they had been paid under the agreement would have been profits from his employment, and the mere fact that they agree on another form of remuneration does not alter its character.
Finally, in Bird (HMIT) v Martland [1982] BTC 259, the employee received a payment in exchange for the loss of use of a company car. Again applying the replacement principle, the compensation was for the withdrawal of a taxable benefit (the company car) and as such was an emolument of the employment.
Taking account of the relevant precedents, the FTT agreed with HMRC, that the lump sum paid to Mr McAllister was an inducement to remain in the employment, even though there was no obligation on him to do so, and accordingly it represented remuneration from that employment.
Further, it was intended to replace future payments of the ICT allowance which would have been taxable emoluments if they had continued to be paid and consequently, the compensation was taxable.
The appeal was dismissed.
This case followed a very well-trodden path and the resulting decision should not come as a surprise, but serves to highlight two important and fundamental issues to be resolved in determining the nature of earnings for income tax purposes: firstly, whether a payment is “from” the employment, and secondly; what the payment is “for”.
[1] Mr McAllister was employed by the Commission of the Northern Ireland Assembly (NIA) as an application development analyst. He led a team of software developers and his role was to provide technical assistance to the NIA and its staff in relation to the software used to carry out the Assembly's legislative business. This case concerns the nature of a lump sum payment of £44,860 made to Mr McAllister for giving up his contractual right to an ICT allowance which was part of his remuneration.
[2] HMRC contend that it was an emolument of his employment within section 62 Income Tax (Employment and Pensions) Act 2003 (ITEPA) and so taxable as earnings.
[3] Mr McAllister argues that the payment did not flow from his employment and is not an emolument of it. He submits that it falls within...
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