Resolute Management Services Limited Mrs Kathleen Ann Haderlein v Her Majesty's Revenue & Customs, SPC 00710
| Jurisdiction | UK Non-devolved |
| Judge | Malcolm GAMMIE QC |
| Judgment Date | 27 August 2008 |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | Resolute Management Services Limited Mrs Kathleen Ann Haderlein |
| Reference | SPC 00710 |
| Court | First-tier Tribunal (Tax Chamber) |
Spc00710
Employee recognising that task for which she had been recruited was complete – over-qualified for continuing job - voluntary resignation notwithstanding loss of redundancy and other benefits of continued employment – ex-gratia payment recognising her decision – whether taxable as earnings – no – whether taxable as a termination payment – yes – whether exempt under UK/US Double Taxation Convention 2001 – yes – appeals allowed
RESOLUTE MANAGEMENT SERVICES LIMITED Appellant
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MRS KATHLEEN ANN HADERLEIN Appellant
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Special Commissioner: MALCOLM GAMMIE CBE QC
Sitting in public in London on 10 April 2008
Akash Nawbatt, counsel, instructed by Reynolds Porter Chamberlain LLP solicitors, for Resolute Management Services Ltd
Mary-Heather Styles of Transatlantic Tax Inc for Mrs Haderlein
A J Mear, HM Revenue and Customs Appeals Unit for the Respondents
© CROWN COPYRIGHT 2008
DECISION
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Resolute Management Services Ltd (“Resolute”) appeals against a determination made on behalf of the Commissioners for HM Revenue and Customs (“HMRC”) dated 17 April 2007 pursuant to Regulation 80 Income Tax (PAYE) Regulations 2003. Mrs Kathleen Haderlein appeals against a closure notice and amendment of her Self-Assessment Tax Return for 2005 issued by HMRC on 2 November 2006 pursuant to section 28A(1) and (2) Taxes Management Act 1970. Both appeals arise from the same transaction – a payment made by Resolute to Mrs Haderlein following the termination of her employment with Resolute – and on 10 December 2007 it was directed that the appeals should be heard together.
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The basic facts giving rise to these appeals were not in dispute and were set out in a Statement of Agreed Facts, which I reproduce below with the omission of the details of the actual amounts of Mrs Haderlein’s salary and bonuses to the extent that such details are irrelevant to the issue that I have to decide. It is not disputed that Mrs Haderlein was properly remunerated having regard to her position with Resolute.
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The Appellant (“Resolute Management Services Limited”) was formerly known as Equitas Management Services Limited. The Appellant is referred to throughout this Statement as “Resolute”.
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The Respondents will be referred to as “HMRC” throughout this Statement.
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Kathleen Haderlein’s employment and benefits associated with that employment
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Mrs Haderlein, a US National, was initially employed by Resolute in November 1996. Her starting salary was £. Her salary at the date of her resignation was £.
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Mrs Haderlein was a senior executive of the company and was remunerated at a level commensurate with that status. She was one of the highest remunerated employees below Board level. During the course of her 8 year employment with Resolute, Mrs Haderlein received 8 pay rises awarded at the annual July salary reviews. She also received 8 annual bonuses (totalling £) and throughout the period of her employment she was in the top 3% of employees in the bonus pool.
Additionally, she received five Long Term Incentive Plan bonus payments which in total amounted to £.
Circumstances leading to Mrs Haderlein’s resignation
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Resolute was formed as part of the Lloyd’s Reconstruction and Renewal plan in 1996 to reinsure the liabilities of Lloyd’s of London, Non Life Syndicates allocated to the 1992 and prior year’s account and to perform the run off of those liabilities. However, given that Resolute was unique amongst commercial businesses, as its purpose was to do itself out of business by successfully settling the 1992 and prior year liabilities, the company eventually began to downsize.
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At this time, Mrs Haderlein’s role effectively changed from managing high volume staff recruitment and establishing human resources policies to establishing a managed headcount reduction programme.
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On 21 July 2004 Mrs Haderlein resigned from Resolute.
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At the date of her resignation Mrs Haderlein’s potential redundancy benefit was assessed to be £152,300 and the outstanding Long Term Incentive Plan awards amounted to £122,500.
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Mrs Haderlein left Equitas on 17 September 2004.
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On 19 November 2004 a payment of £150,000 was made to Mrs Haderlein by Equitas. [I refer to this hereafter as “the ex gratia payment”.]
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In early November 2004, Mrs Hadlerlein contacted Equitas to provide bank details for the account to which the payment should be sent. Mr Scott Moser authorised the payment to be transferred on 17 November 2004 and the transfer was effected on 19 November 2004. A schedule of the payment was sent to Mrs Haderlein on 18 November 2004. On 7 December 2004, Mr Moser sent a memorandum to the Chairman of Equitas asking for his signature to document the payment.
The Assessment and the Appeal
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On 18 August 2006, the Employer Compliance Officer, Mr Brown, asked Resolute to provide further information and documentation relating to the payment made to Mrs Haderlein. Correspondence then ensued between the parties.
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On 17 April 2007, the Compliance Support Officer, Mr McDonald, issued a Determination under Regulation 80 Income Tax (PAYE) Regulations 2003 and a section 8 Decision. On 10 May 2007 Equitas appealed against the Section 8 decision.
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On 13 July 2007 the appeal was withdrawn HMRC has given an undertaking not to seek payment of any NIC that may have been due.
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The Regulation 80 Determination remains under appeal.
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I heard evidence from Mr Scott Moser, the Chief Executive Officer of Resolute, and Mrs Kathleen Haderlein. There was also an agreed bundle of documents incorporating the exhibits referred to in Mr Moser’s and Mrs Haderlein’s witness statements. Based on their evidence and the documents I find the following further facts in relation to this matter:
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Before she joined Equitas Management Services Ltd (referred to hereafter as “Resolute”), Mrs Haderlein had gained 20 years experience working in Human Resources. Her experience was mainly derived from working for Argonaut Insurance Co, a publicly quoted US Insurer where, for the last 6 years of her employment, she was Vice President of Human Resources. She was asked to join Resolute as Head of Human Resources as a result of representations made by Michael Crall, a fellow US citizen and the first CEO of Resolute Mrs Haderlein had worked with Mr Crall at Argonaut Insurance, where he had seen her deal with HR issues similar to those that he expected to face at Resolute. These included bringing together and creating a company identity that all sectors could feel part of the development of company procedures and high volume staff recruitment.
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Mrs Haderlein’s employment as Director of Human Resources commenced on 4 November 1996, shortly after Resolute commenced business. She relocated from the US to the UK to take up the position. Her contract of employment contained standard terms and provided that her employment could be terminated by six month’s notice in writing by either party. It contained no provision under which Mrs Haderlein could be said to have been entitled to the ex gratia payment.
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Resolute was part of the Equitas group that had been established to contain the uncertainties that arose from various long-tail liabilities which threatened to destabilise the Lloyd’s insurance market. It had an unusual business model because it was set up with the intention of ‘working itself out of business’. Initially, however, there was pressure to recruit suitable staff of the right calibre who could handle the issues of these long-tail liabilities. As Mrs Haderlein put it, “The HR department was under pressure when I was first appointed as we ‘hit the ground running’. There was no gentle lead-in because the company was required to show results from Day 1.”
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Between 1996 and 1998 Resolute...
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