Panesar
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 November 2012 |
| Neutral Citation | [2012] UKFTT 688 (TC) |
| Date | 08 November 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 688 (TC)
Judge Rachel Short, Dr Michael James
Mr B Panesar appeared for the Appellant
Mr Peter Massey, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax - post office compensation payment - compensation for loss of business and investment - no - payment for loss of office - yes - partial attribution to previous office holder- no
The First-tier Tribunal decided that a post office's payment to a taxpayer sub-post mistress as part of a network re-invention scheme ("NRS") was a payment to an office holder under the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003"), Income Tax (Earnings and Pensions) Act 2003 section 5s. 5. As the taxpayer failed to prove that the payment was from a clear source outside her employment, the payment was taxable under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 chapter 401s. 401. The Tribunal also decided that the payment was for the taxpayer's loss of office and not a compensation for her loss of investment in a business. It was clear that no payment would have been due had the taxpayer continued in her role, and the termination of her office and the cessation of the business were inextricably linked. Finally, as there was no suggestion that the taxpayer's business was a partnership and that part of the payment was due to her husband, the payment could not be partially attributed to him.
The taxpayer appealed against HMRC's closure notice in respect of the treatment of a sum of £79,577 paid to her by the post office on 5 October 2004.
The taxpayer was as sub-post mistress of a post office which was run from rooms located in a freehold property which she owned jointly with her husband Mr P. She took that role on the resignation of Mr P as the sub-postmaster of the same branch.
In October 2004, the taxpayer received an offer of compensation of £79,577 from the post office as part of a scheme arising from a network re-invention programme ("NRP"). That was paid into the taxpayer's joint non-business account with Mr P and was not declared in the income tax returns of either holder of the account.
In June 2008, HMRC wrote to the taxpayer arguing that the sum was subject to income tax, save for the first £30,000; therefore, she had a further sum of £18,029.46 of tax due for the tax year 2004-05.
The taxpayer argued that the payment was not taxable under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401. Although it was paid at the time when she resigned as sub-post mistress, that did not reflect the true substance of that payment. She used the analogy of someone being taxed for their lottery winnings under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401 because, having won the lottery, they resigned from work. Even if payments under the NRS could generally be treated as taxable under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401, the payment to the taxpayer was made outside the terms of the NRP. An element of the payment should be attributable to Mr P for his term of office and the investment which he made in the business.
HMRC submitted that it was generally accepted that sub-postmasters should be treated as office holders for those purposes. The taxpayer was the office holder for the purposes of ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 5s. 5. The payment was actually calculated on the basis of a family transfer; hence, she had been paid within NRP's terms.
(2) Whether the payment made to the taxpayer could be treated as a payment to an employee or office holder under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401.
(3) Whether the payment was in consideration for the taxpayer's loss of office.
(4) Whether the payment should be partially attributed to Mr P for his term of office and the investment which he made in the business.
Held, dismissing the taxpayer's appeal:
The Tribunal held that the essence of the taxpayer's role was that of an office holder under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 5s. 5. It was clear that the taxpayer's role existed independently of her and had been filled by successive holders, including Mr P.
The onus of proof was on the taxpayer to demonstrate that the payment fell outside ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401. There ought to be a clear source of the payment which was outside the scope of the employee or office holder's contractual obligations. Here, the taxpayer's reference to national lottery winnings was not a correct analogy. First, in the case of a lottery win, the employee won the lottery and then resigned; the resignation was the result of the lottery win. In this instance, cause and effect were the other way around as the taxpayer's resignation was a condition of the payment. Second, the lottery payment was from a third party, a different source, and not from the employing entity, as was the case here. Therefore, the payment was taxable under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401.
The Tribunal also held that it might be possible to argue that the payment was a compensation to the taxpayer's loss of investment in the business. It was also possible that the payment was not an immediate consequence of the termination of the taxpayer's office, but part of a wider agreement with the post office. However, it was much harder to establish, in the terms of ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401, that the payment was not indirectly in consideration of the loss of office. The terms and details of the payment might not precisely reflect what was due to the taxpayer on the termination of her office. However, it was clear that no payment would have been due had the taxpayer continued in her role, and the termination of her office and the cessation of the business were inextricably linked.
Lastly, the Tribunal held that it was possible to split a compensation payment between two distinct sources and tax it accordingly. However, on the facts of this case, there was no suggestion that the taxpayer's business was a partnership so that some of the payment could properly be allocated to Mr P. There was no evidence in the documents on the basis of which the payment was made that any of it was due to Mr P.
1.This is an appeal against a closure notice for the 2004-05 tax year in respect of the treatment of a sum of £79,577 paid to Mrs Panesar in October 2004 and three penalty assessments for 2002-03 amounting to £353, for 2003-04 amounting to £360 and for 2004-05 amounting to £4417. The original appeal also referred to penalties for the 2001-02 period but HMRC have agreed to withdraw this claim on the basis that there is no tax to pay for that period.
2.The original appeals also referred to discovery assessments for the 2001-02 and 2002-03 periods and a closure notice for the 2003-04 tax period. These have now all been settled on the terms set out in HMRC's letter of 12 January 2012 and were not therefore considered by this Tribunal.
3.No evidence having been submitted to the Tribunal by the Appellant in respect of the penalties for the 2002-03, 2003-04 and 2004-05 periods, the Tribunal agreed to adjourn consideration of those matters and continue to hear the appeal concerning the main matter under consideration, the tax treatment of the £79,577 paid to Mrs Panesar by the Post Office in October 2004 (the Compensation payment).
4.Since the date of this Tribunal the HMRC have withdrawn these penalty...
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