Rubio
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 May 2012 |
| Neutral Citation | [2012] UKFTT 361 (TC) |
| Date | 30 May 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 361 (TC)
Judge Greg Sinfield, David E Williams CTA
Mr Peter Moroz appeared for Mr Gomez Rubio
Mr Chris Birkett of HM Revenue and Customs appeared for the Respondents
Income tax - Whether lump sum on termination of employment chargeable to income tax under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 62s. 62 - Held yes - Whether additional tax recovered from employer creditable to former employee in full or in part as under SI 2003/2682, reg. 185(2) - Held no - Appeal allowed in part
The First-tier Tribunal decided that payments made to a taxpayer due to termination of his employment in lieu of notice, were not chargeable as earnings under Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003"), Income Tax (Earnings and Pensions) Act 2003 section 62s. 62, but were within the provisions of ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401. The applicable foreign service exception under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 413s. 413 made such payments not chargeable to tax. Hence, the taxpayer was entitled to a refund of the amount of tax already paid. However, the Tribunal ruled that the taxpayer was not, in any way, entitled to a refund of an additional payment made by his former employer to HMRC under a contractual settlement to account for its Pay As You Earn ("PAYE") liabilities, because the taxpayer was never a party to the agreement and he neither suffered nor was liable to suffer for the same.
The taxpayer appealed against amendments made by HMRC under Taxes Management Act 1970, Taxes Management Act 1970 section 28A subsec-or-para 1 section 28A subsec-or-para 2s. 28A(1) and s. 28A(2) following an enquiry into his personal tax return for 2003-04.
The taxpayer, a resident of Spain, was employed by a company in Spain ("Symbol Spain") under an employment contract dated 1 August 1991. The terms of the contract substantially provided, among other things, that in the event of involuntary termination, the employee would receive financial compensation equivalent to one and a half year's pay with bonuses and other benefits of the post.
In 30 June 2000, the taxpayer was assigned to a position working for a UK-based associated company ("Symbol UK"), and employed on a UK based local contract and on local terms. His employment contract stated that he would be regarded as under a leave of absence from Symbol Spain, but his status and compensation level was maintained. His contract in the UK was extended until June 2003. However, the taxpayer's relationship with his employers soured by April 2003, and by 9 June 2003, Symbol UK revoked the taxpayer's company ID card and prevented him from accessing his office, his company email and voicemail.
After negotiations, Symbol UK, Symbol Spain and the taxpayer entered into a compromise agreement dated 7 August 2003, which provided that the taxpayer's employment with Symbol UK, Symbol Spain and all associated companies was terminated on 31 July 2003. It also provided that taxpayer would be paid various sums amounting to £694,783.
During his assignment to Symbol UK, the taxpayer was resident, but not ordinarily resident, in the UK. HMRC accepted that, during his employment by Symbol UK, the taxpayer spent 60.5 per cent of his time working outside the UK and, as earnings under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 62s. 62 was limited by ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 25s. 25 to general earnings in respect of duties performed in the UK, it followed that only 39.5 per cent of his income was subject to UK tax. HMRC accepted that Symbol UK paid £694,783, less deduction of £72,477.16 tax under PAYE, to the taxpayer on 15 August 2003.
In his return for 2003-04, the taxpayer submitted that the amount £694,783 in box 1.25 qualified for foreign service and disability relief. He made a white space entry stating that the amounts included in boxes 1.24 to 1.26 were non-contractual amounts paid by his former employer by way of compensation for loss of rights, as set out in the compromise agreement dated 7 August 2003. The return showed that Symbol UK had deducted tax of £72,477.16 under PAYE and claimed a repayment of £59,681.72 on the basis that the taxpayer's actual liability to tax for the period was £12,795.58.
HMRC opened an enquiry into the return and, after an exchange of correspondence with the taxpayer, the tax treatment of several amounts remained in dispute.
Symbol UK had deducted tax of £72,477.16 from the payment to the taxpayer in 2003. Moreover, following an employer compliance review, Symbol UK paid £24,012 to HMRC on account of tax due in relation to the taxpayer on 22 November 2006. At the conclusion of the employer compliance review, HMRC determined that the further amount that should have been deducted by Symbol UK was £17,165.57. That amount (plus interest) was settled by deduction from the amount paid in November 2006. The correct further amount of tax should have been £10,530.13.
HMRC issued a closure notice on 10 February 2011 showing the refund due as nil and the additional tax due as £10,530.13. Because an amount in excess of £10,530.13 had already been paid by the employer, HMRC gave the taxpayer credit for £10,530.13 and amended the return to nil. Following correspondence between HMRC and the taxpayer, the latter appealed to the Tribunal, stating that the amendment to the return was incorrect and an amount of £83,693.72 (the £59,681.72 repayment claimed by him in his return and £24,012 paid by Symbol UK in November 2006) should be refunded to him.
HMRC submitted that the taxpayer's contract dated 1 August 1991 with Symbol Spain had revived, with its original terms and conditions intact, when the contract with Symbol UK ended on 31 July 2003. They relied on the fact that the parties had originally intended that the taxpayer would transfer back to Spain at the end of the assignment to the UK as his assignment was described as a leave of absence. They added that the 1991 contract contained provisions for payment in lieu of notice, namely the clause that provided that the taxpayer was entitled to receive financial compensation equivalent to one and a half year's pay with bonuses and other benefits if the contract was terminated after 31 December 1991.
HMRC's case was that the 1991 contract was in force when the payment was made by Symbol UK on 8 August 2003 and that the disputed elements of the payment were made under that contract and so were taxable under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 62s. 62. HMRC contended that the three payments in lieu of salary, bonus and benefits matched the notice provisions in the 1991 contract and, therefore, such payments were from the employment with Symbol Spain rather than from the termination of the employment with Symbol UK.
HMRC also submitted that the 22 November 2006 payment was made under the informal procedure, an alternative to the notice procedure in Income Tax (PAYE) Regulations 2003 (SI 2003/2682), ("PAYE Regulations 2003"), wherein HMRC might agree to an amount to be paid by any employer in settlement of any claims. Such was the payment made in 2006, on account of an amount owed by Symbol UK in respect of PAYE. The taxpayer did not suffer deduction as the company paid to HMRC in November 2006 after having already paid the taxpayer. He had by then long since severed any connection with the company, having resigned in August 2003 and so it was too late for the company to make any deduction.
The taxpayer submitted that the 1991 contract ceased to have effect on 30 June 2000 and, in the absence of any contractual entitlement, the payments in dispute should properly be categorised as payments of damages. He contended that that the disputed elements were chargeable under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401, and that ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 413s. 413 provided relief on the full amount as he had left the UK and was in Spain when the payment was made to him.
The taxpayer also argued that, with respect to the payment made by Symbol UK in 22 November 2006, HMRC relied on the PAYE Regulations 2003, reg. 185 as basis for their refusal of repayment. He contended that the regulation was not engaged in this case because such applied only where the employer was liable to deduct tax. If the tax was not chargeable, the employer would not be liable to deduct it under PAYE and it should be repaid to the taxpayer because it was paid on his account.
(2) Whether the disputed amounts paid by Symbol UK to the taxpayer on 15 August 2003 were payments of the taxpayer's earnings in relation to his employment, and thus within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 62s. 62, or payments paid in consideration of, or in consequence of, or otherwise in connection with, the termination of his employment, and thus within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401.
(3) Whether the taxpayer was entitled to a refund of any part of the amount originally paid by Symbol UK to HMRC in 22 November 2006.
Held, allowing the taxpayer's appeal in part:
The Tribunal explained that the taxpayer's termination case fell within the fourth category enunciated by Lord Browne-Wilkinson in Delaney v StaplesELR[1992] 1 AC 687, namely, that "[w]ithout the agreement of the employee, the employer summarily dismissed the employee and tendered a payment in lieu of proper notice." In this case, Symbol UK, without the agreement of the taxpayer, summarily dismissed him and agreed to make a payment in lieu of proper notice. Symbol UK was in breach of contract by dismissing the taxpayer without proper notice, but the summary dismissal was effective to put an end to the employment relationship. As the employment relationship had ended, it followed...
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