Richardson (Inspector of Taxes) v Delaney
| Jurisdiction | England & Wales |
| Judgment Date | 11 June 2001 |
| Date | 11 June 2001 |
| Court | Chancery Division |
Chancery Division.
Lloyd J.
Bruce Carr (instructed by the Solicitor of Inland Revenue) for the Crown.
The taxpayer did not appear and was not represented.
The following cases were referred to in the judgment:
Abraham v Performing Rights Society ICR[1995] ICR 1028
Dale v de Soissons TAX(1950) 32 TC 118
Delaney v Staples ELR[1992] 1 AC 687
EMI Group Electronics Ltd v Coldicott (HMIT) TAXTAX[1999] BTC 294;(1999) 71 TC 455
Income tax - Employment - Salary in lieu of notice - Taxpayer received lump sum on termination of employment - General commissioners found that lump sum was compensation for breach of contract - Whether payment in lieu of notice pursuant to contractual provision properly regarded as emolument from employment - Income and Corporation Taxes Act 1988,Income and Corporation Taxes Act 1988 section 19 subsec-or-para 1 section 148ss. 19(1), 148.
This was an appeal by the Revenue from a decision of general commissioners that a lump sum received on termination of employment was compensation for breach of contract and taxable under Income and Corporation Taxes Act 1988 section 148s. 148 of the Income and Corporation Taxes Act 1988 rather than a contractual payment derived from his employment taxable under Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1)s. 19(1) of the 1988 Act.
The taxpayer was employed by the company from 1 December 1994. His salary was £60,000 a year. His service agreement was terminable on 18 months' notice. The company at its discretion could terminate the employment with immediate effect by paying salary in lieu of notice. The agreement also contained restrictive covenants which operated after termination. The taxpayer was informed by letter of 1 December 1995 that his employment had been terminated. A second letter dated the same day and marked "without prejudice" set out the employer's proposals concerning the termination of his employment. The employee was placed on "gardening leave" and started negotiations with the employer following which he accepted a sum of £75,000 and a car valued at £10,000 in settlement. On that basis it was mutually agreed that his employment terminated on 28 December 1995. The taxpayer appealed against a Sch. E income tax assessment in the sum of £139,272 which included the lump sum of £75,000. The taxpayer argued that the payment was in compensation for breach of contract and therefore taxable under Income and Corporation Taxes Act 1988 section 148s. 148 which applied to payments and other benefits (to the extent that they amount in aggregate to more than £30,000) received directly or indirectly in consideration or in consequence of, or otherwise in connection with, the termination of his employment, which would not otherwise be chargeable to tax. He was therefore entitled to receive the first £30,000 tax free. General commissioners upheld that contention. The Revenue appealed arguing that the lump sum was taxable as an emolument of the employmentIncome and Corporation Taxes Act 1988 section 19 subsec-or-para (1)s. 19(1) of the 1988 Act.
Held, allowing the appeal:
1. A payment in lieu of notice made in pursuance of a contractual provision under which an employer could terminate the employment on making such a payment was properly regarded as an emolument from employment taxable under Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1)s. 19(1). (EMI Group Electronics Ltd v Coldicott (HMIT) [1999] BTC 294 applied.)
2. In the present case, on the facts and on the evidence, there were no grounds on which the commissioners could find that the company was in breach of contract. What the taxpayer received was not identical to that which was provided for under the contract of employment, although in financial terms it was not substantially different. In any event the termination of the employment was, to some extent at any rate, on the basis of an ad hoc agreement between the parties and there was no breach by the employer. The employer acted in pursuance of its rights under the contract to give a notice, not one that was immediately effective to terminate the employment, as the commissioners might have thought, but one which left the taxpayer in his position as an employee of the company, entitled to be paid, bound by his obligations to the company, and a notice which only altered the immediate position in the sense of requiring him not to attend for work, something which itself was within the employer's rights under cl. 2.2 of the service agreement. The employer was acting within its rights in giving notice on 1 December and was acting lawfully when it came to an agreement with the taxpayer on or about 28 December whereby the employment came to an end by agreement in consideration of the payment. The general commissioners' conclusion was one which was based on a finding which was not open to them, and the only possible conclusion was that the whole sum was chargeable to tax, rather than only the excess over £30,000, under Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1)s. 19(1).
1. At a meeting of the Commissioners for the General Purposes of Income Tax for Westbury, Wiltshire held on 14 September 1999 at Westbury, Wiltshire Kevin J Delaney (the taxpayer) appealed against an assessment to tax under Sch. E for the year 1995-96 in the sum of £139,272 raised on him by HMIT Bath on 30 January 1997.
2. The £139,272 assessed included a lump sum payment of £75,000. It was common ground that the £75,000 should be taxed under eitherIncome and Corporation Taxes Act 1988 section 19 subsec-or-para (1)s. 19(1) of the Income and Corporation Taxes Act1988 ("ICTA 1988") or Income and Corporation Taxes Act 1988 section 148s. 148 of ICTA 1988 (which would entitle the taxpayer to receive the first £30,000 free of tax). Therefore the question for the commissioners' determination was whether the payment of £75,000 was derived "from" the taxpayer's employment with his former employers, Lyons Seafood Ltd ("the company"), and therefore chargeable to tax under Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1)s. 19(1) of ICTA 1988, or was paid to the taxpayer in compensation for a breach of contract, and therefore chargeable to tax under Income and Corporation Taxes Act 1988 section 148s. 148 of the ICTA 1988.
3. The Crown was represented by Stephen Gretton, HM Inspector of Taxes, Bath District. The taxpayer was represented by Paul Giessler of Berkeley Hall, chartered accountants, of Warminster, Wiltshire. The taxpayer gave oral evidence before the commissioners.
4. [List of documents proved or admitted before the commissioners.]
5. From the oral and documentary evidence before the commissioners they found the following facts:
5.1. The taxpayer had been employed by the company from 1 December 1994 at a salary of £60,000 per annum. The terms of this employment had been governed by the provisions of a service agreement.
5.1.1. Clause 1.2 of the service agreement provided:
The employment of the Executive shall (subject to the provisions of clause 13) be for an indefinite period and shall be terminable by either the Company or the Executive giving to the other 18 months' notice in writing expiring at any time.
5.1.2. Clause 1.3 of the service agreement provided:
The Company may at its absolute discretion elect to terminate the employment of the Executive with immediate effect by paying to the Executive salary in lieu of notice.
5.1.3. Clause 13 of the service agreement provided:
The employment of the Executive may be terminated by the Company forthwith without notice or payment in lieu of notice if the Executive…
and nine grounds were there listed. The parties agreed that none of the grounds applied in this case.
5.2. The taxpayer was informed by a letter dated 1 December 1995 that his employment with the company had been terminated. A second letter marked "without prejudice" and also dated 1 December 1995 set out the company's proposals in relation to the termination of the employment.
5.2.1. The fourth paragraph of the second letter of 1 December 1995 provided:
In compensation for the termination of your employment and loss of office, and without admission of any liability whatsoever, the Company will pay to you the total gross sum of £68,001, less tax as required by law. This sum will be paid to you after tax in two instalments as specified in paragraphs 15 and 16 of this letter.
5.3. Following the letters of 1 December 1995 the taxpayer entered into negotiations with the company and was on garden leave during this time. The taxpayer accepted a sum of £75,000 plus the transfer of a car (the value of which, for the purposes of this appeal, was agreed by the parties and not in issue) in settlement of those negotiations. The taxpayer's employment with the company ceased on 28 December 1995.
6. It was contended for the taxpayer that:
6.1. The assessment of the taxpayer's income from employment of £121,621.44 included a sum of £75,000 paid to him by the company on the termination of his employment with the company which said sum had been charged to tax under Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1)s. 19(1) of ICTA 1988 as income from the employment but that it should be charged to tax underIncome and Corporation Taxes Act 1988 section 148s. 148 as that sum of £75,000 was paid in compensation for breach of the contract.
6.2. Income and Corporation Taxes Act 1988 section 19 subsec-or-para (1)Section 19(1) charged emoluments of employment to tax under Sch. E and the taxpayer referred to the definition of "emoluments" under Income and Corporation Taxes Act 1988 section 131 subsec-or-para (1)s. 131(1).
6.3. Income and Corporation Taxes Act 1988 section 148Section 148 of ICTA 1988 applied to payments on the termination of employment that were not otherwise chargeable to tax and the first £30,000 of such payments caught under...
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