Reid
| Jurisdiction | UK Non-devolved |
| Judgment Date | 09 February 2016 |
| Neutral Citation | [2016] UKFTT 79 (TC) |
| Date | 09 February 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Richard Chapman, Peter Whitehead
Mr Mike Obertelli appeared for the Appellant
Mr Matthew Mason, Higher Officer of HMRC, appeared for the Respondents
Income Tax – Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), s. 62 – Buy-out payments, – Whether or not earnings in relation to an employment – Compensation for the loss of rights to a reward and benefit scheme – The replacement principle – Appeal allowed in part.
The First-tier Tribunal (FTT) allowed Mr Reid's appeal in part that a payment under a Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) agreement was compensation for the loss of pension rights following the termination of his employment with BP.
Mr Reid was employed by BP for many years in the aviation department. In early 2010, BP announced that part of its business was going to be transferred to S & J D Robertson North Air Ltd (North Air). Part of this process involved the transfer of 20 employees (including Mr Reid) from BP to North Air under the TUPE Regulations. It was agreed that the employees would move to North Air reward and benefit scheme and relinquish their access to the BP scheme (BP pension scheme, BP Variable Pay plan, Annual Operating Bonus, UK Sharematch and Lunch Allowance). In return the employees would receive a lump sum as a part of the buy-out arrangement. The TUPE transfer took place on 1 April 2010 and Mr Reid received a sum on £25,396 on 21 May 2010. Mr Reid left North Air's employment in April 2011.
HMRC argued that the payment was taxable under ITEPA 2003, s. 62 as it was not a payment from the termination of employment but was a payment for relinquishing access to the BP reward and benefit scheme and moving to the North Air scheme. Mr Reid contended that the payment was a compensation payment for the loss of pension rights following the termination of his employment with BP and, as it was less than £30,000, was exempt under ITEPA 2003, s. 401.
HMRC stated that Mr Reid should be treated in the same way as the employees in Hamblett v Godfrey (HMIT) TAX[1987] BTC 83. The FTT accepted that there were similarities between the cases as the payment was compensation for a change in contract terms. However, the reason why the payment in Hamblett v Godfrey was treated as earnings was because of the analysis of the lost rights which were being recognised by the payment. Taking the same approach, the FTT found that the lost rights in this case which were being recognised by the payment were the scheme rights. The finding that the loss of the scheme rights was the sole reason for the payment being made was not, however, the end of the matter. The payment was effectively a lump sum in lieu of contingent rights. The rights in question were the scheme rights and the contingency was that of continued employment with BP and the expectation of the continuation of those scheme rights. It followed that the replacement principle engaged, with the effect that the contingent rights compensated for by the scheme rights had to be treated the same way as the rights or expectations which were being replaced. Thus the FTT did not accept that the loss of expectation of pension rights was determinative of the payment as a whole.
The FTT held that the element of the payment for the loss of pension expectations was a lump sum in respect of a contingent right to additional pension, and by virtue of the replacement principle, should have the same character. This part of the payment was therefore derived from expected additional pensions rather than from, or an emolument of, employment. Following the decision of the FTT in Kuehne + Nagel Drinks Logistics Ltd v R & C Commrs TAX[2010] TC 00314 this element of the lump sum payment was not taxable as earnings and the FTT therefore allowed the appeal relating to the compensation for the loss of expectation of pension rights. However, it considered Mr Reid had failed to establish that the elements of the payment relating to shares, bonus and lunch time allowance were not chargeable to tax and the FTT dismissed the appeal in respect of these elements. As the payment had not been broken down the FTT could not find as to the precise amount of the payment chargeable to tax. However, the agreement provided that the sum attributable to pensions was equivalent to 42% of Mr Reid's base salary on 1 May 2010. The FTT decided the parties should proceed on this basis but if they were unable to agree then written submissions limited to this issue would be invited.
The character of a payment which is made in satisfaction of, or to replace, a contingent right to another payment is generally treated in the same way as that contingent right. The Judge in this case found the replacement principle as referred to in Kuehne (FTT) compelling and, while that decision was not binding on the FTT, an accurate analysis of the law. However unlike Kuehne, in this case the payment had different components paid which were paid for different reasons. Thus the payment could be apportioned as the payment was in reality a number of different entitlements paid in one lump sum rather than separately.
[1] This appeal is against a closure notice issued on 15 April 2013 amending Mr Reid's self assessment tax return for the 2010/2011 tax year to add further employment income in the sum of £25,396. The whole of this £25,396 related to a payment made to Mr Reid by his former employers (the Payment), BP plc (BP). In short, this appeal turns upon whether or not the Payment constituted taxable earnings for the purposes of section 62(2) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
[2] The factual background to the appeal was not in dispute and can be stated briefly.
[3] Mr Reid was employed by BP for many years. He ultimately rose to be a technical supervisor for Scotland in the aviation engineering department. His responsibility was for the building and maintenance of trucks.
[4] In early 2010, BP announced to Mr Reid and his colleagues that part of its business was going to be transferred to S & J D Robertson North Air Limited (North Air). Part of this process involved the proposed transfer of approximately employees from BP to North Air pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (the TUPE Regulations and the TUPE Transfer respectively).
[5] A three month consultation period followed between BP, North Air and a committee of three employees (of which Mr Reid was one) to deal with various implications of the TUPE Transfer. In particular, this related to payments for the loss of rights to a reward and benefit scheme and also a loyalty payment.
[6] The consultation process resulted in an agreement between the employees (through the committee) and BP dated 26 February 2010 (the Framework Agreement). The Framework Agreement included the following terms:
The Company (BPI) and Representatives from the BP plc (Air BP UK) non-unionised constituency have reached an agreement concerning the transition of transferring employees from BP plc to the S & J D Robertson North Air Ltd (North Air) reward and benefits scheme.
The Representatives have completed a consultative exercise on 04th February 2010 and the agreement has been accepted by the constituency.
Upon the TUPE of BP employees on 01st April 2010 (or date thereafter), in-scope employees will move to the North Air reward and benefit scheme and relinquish their access to the BP reward and benefit scheme (BP Pension Scheme, BP Variable Pay Plan/Annual Operating Bonus, UK Sharematch and Lunch Allowance) [Emphasis added].
In return the in-scope employees will receive a buy-out arrangement as follows:
Employees will receive a lump sum payment, in the May 2010 payroll, equivalent to the following formulae:
1
Two years difference in Company contributions between the BP Pension Scheme and the North Air Group Pension
Equivalent to 42% of base salary on 01st May 2010
2a
For graded employees: Two years difference in the Company planning assumption between BP Variable Pay Plan and the North Air Performance Bonus Scheme
[not included in this decision for reasons of confidentiality]
2b
For non-graded employees (employees at LHR): Two years difference in the Company planning assumption between BP Annual Operating Bonus and the North Air Airfield Operators Discretionary Performance Bonus Scheme
[not included in this decision for reasons of confidentiality]
3
A payment equivalent to two years of Company contributions to UK Sharematch
[not included in this decision for reasons of confidentiality]
4
A payment equivalent to two years of lunch allowance, only payable to employees currently in receipt of this payment
[not included in this decision for reasons of confidentiality]
Employees in service with the Company on 01st May 2011 will receive a payment equivalent to 3 months base salary plus 30% in the May 2011 payroll.
[7] It follows that the rights which were the subject of the buy-out payment were, according to the Framework Agreement, those in bold above. These were, therefore, pension rights, bonus rights, share rights and lunch allowances (the Scheme Rights).
[8] The Framework Agreement was included within a pack of documents sent to each relevant employee (the Information Pack). This was accompanied by an undated covering letter which included the following:
As you are aware, BP plc (the Company) is intended to transfer its UK into-plan business to S & J D Robertson North Air Ltd (North Air) and your employment with North Air will transfer on 01st April 2010 (Transfer Date). This is a result of the transfer of storage and into-plane operating agreements into North Air.
In order to comply with the Transfer of Undertakings (Protection of Employment) Regulations 2006, we are required to inform and consult with you about various matters in...
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