Resolute Management Services Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 27 August 2008 |
| Date | 27 August 2008 |
| Court | Special Commissioners |
special commissioners decision
Malcolm Gammie CBE QC
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
AJ Mear, HM Revenue and Customs Appeals Unit for the Respondents
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
A special commissioner decided that an ex gratia payment made to an employee, who resigned voluntary notwithstanding loss of redundancy and other benefits of continued employment, was not earnings for the purposes of Income Tax (Earnings and Pensions) Act 2003 section 62ITEPA 2003, s. 62 as it was paid in recognition of the fact that she had done the right thing in resigning. Further, although it was a termination payment within Income Tax (Earnings and Pensions) Act 2003 section 401s. 401, as a payment that was made in consequence of or in connection with the termination of employment, the portion of the payment that would otherwise be charged to UK tax was nevertheless exempt by virtue of art. 22(1) of the UK-US Double Taxation Convention.
The taxpayer company appealed against a determination made by Revenue and Customs pursuant to reg. 80 of the Income Tax (Pay As You Earn) Regulations 2003, and H, a former employee of the company, appealed against a closure notice and amendment of her self-assessment tax return issued pursuant to TMA 1970, Taxes Management Act 1970 section 28A subsec-or-para 1s. 28A(1) and (2). Both appeals arose from a payment made by the taxpayer company to H following the termination of her employment with the company.
H, a US national, was initially employed by the company in November 1996 as a senior executive and human resources director. In 1992, the company began to downsize and H's role changed from managing high volume staff recruitment and establishing human resources policies to establishing a managed headcount reduction programme. In 2004 after eight years with the company H resigned, believing that she had accomplished the task she had been recruited for, and that the next stage of the company's life did not require someone of her qualifications and experience to lead the HR function. At that time she would have been entitled to a redundancy benefit of some £152,300. She gave up outstanding awards of £122,500 under the company's long-term incentive plan. The company made her an ex gratia payment of £150,000. Basic rate tax was deducted on the amount of the payment over £30,000.
The Revenue maintained that the ex gratia payment was chargeable to tax as general income from the employment under Income Tax (Earnings and Pensions) Act 2003 section 62ITEPA 2003, s. 62. However, the company argued that the payment was only taxable under ITEPA, s. 401 as a payment in connection with the termination of H's employment, so that the correct amount of tax had been deducted and accounted for. H contended that the payment was a personal gift and was not chargeable to tax at all. Alternatively, if it was taxable as her income it was exempt from tax under art. 22 of the UK-US Double Taxation Convention 2001.
Whether the ex gratia payment was chargeable to tax as general income from the employment under ITEPA 2003, s. 62 or only under s. 401 as a payment in connection with the termination of employment; or, if it was taxable as income, whether the payment was exempt from tax under art. 22 of the UK-US Double Taxation Convention 2001.
The special commissioner (Malcolm Gammie QC) (allowing the appeals) said that it was apparent that the payment was truly ex gratia since H had no contractual entitlement to it. She did nothing to earn it in the conventional sense and it was not paid in return for her resignation. A gratuity or gift was, however, not removed from a charge to tax as employment income by that fact alone. The question was whether the payment was for acting as or being an employee or a payment for something else. The fact that the payment was made voluntarily after the employment had ceased did not prevent it being earnings. The fact that the payment might be within ITEPA 2003, s. 401 of was irrelevant if s. 62 applied because s. 62 took priority.
A payment did not lose its character as earnings because it was paid to recognise the personal qualities that the employee had exhibited in the course of rendering services. The payment remained earnings for employment services even if it purported to be for rendering the services with a smile. But that was not the case when the personal quality involved was recognising that the time had come to leave.
In all the circumstances, the ex gratia payment was not general earnings within ITEPA, s. 62. It was a termination payment within s. 401. The language of s. 401(1) was cast in the widest terms and the payment was in consequence of or in connection with the termination of H's employment.
That left the question whether the payment was exempted from charge to UK income tax by the provisions of the UK-US Double Taxation Convention 2001. Article 14(1) of the Convention adopted the language of art. 15(1) of the OECD Model Tax Convention. They both referred to "salaries, wages and other similar remuneration". Based on their ordinary meaning, the ex gratia payment was neither "salary" nor "wages" and it was difficult to see that it was "other similar remuneration". ITEPA did not treat a termination payment as ordinary earnings (within which fell salary and wages and other similar remuneration) but as "an amount that counts as employment income" (Income Tax (Earnings and Pensions) Act 2003 section 7 subsec-or-para 2 section 7 subsec-or-para 4 section 7 subsec-or-para 6ss. 7(2)(c), (4) and (6)). The context of ITEPA at least indicated that termination payments were not what the Act regarded as ordinary earnings even though termination payments were taxed within the framework of ITEPA as something counting as employment income.
"Remuneration" was a wider term than salary but still involved the concept of something that was given as a quid pro quo for services rendered. In the present case, the only thing for which the ex gratia payment could be described as a quid pro quo was the fact that H had voluntarily resigned her position as human resources director. An ex gratia payment that the company chose to make following resignation in such circumstances could not be described as remuneration in any ordinary sense of the word. It was not solely the fact that it was ex gratia, but the payment lacked the necessary nexus with services rendered that usually characterised payments as salary, wages or other similar remuneration. There was nothing in the context of the Act or in the language of the Convention to indicate that art. 14 of the Convention should be construed as encompassing anything that fell within the charge to tax under Sch. E or within ITEPA. Thus the gratuitous payment should not be treated as within the Treaty concept of "salaries, wages and other similar remuneration" just because it happened to be taxed by the UK as an amount that counted as employment income. The result was that the payment was other income and exempt under art. 22 of the Convention.
1. 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 (Pay AsYou Earn) 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 Taxes Management Act 1970 section 28A subsec-or-para 1 section 28A subsec-or-para 2section 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.
2. 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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(2) 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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(3) The Respondents will be referred to as "HMRC" throughout this Statement.
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(4) Kathleen Haderlein's employment and benefits associated with that employment
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(5) 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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(6) 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.
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(7) Additionally, she received five Long Term...
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