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The taxpayer's appeal in Venables and others v Hornby was allowed in the High Court. MATTHEW HARRISON of C W Fellowes Ltd elucidates.
The taxpayer's appeal in Venables and others v Hornby was allowed in the High Court. MATTHEW HARRISON of C W Fellowes Ltd elucidates.
The key issue in Venables and others v Hornby [2001] STC 1221 was whether or not a person could be said to have retired while retaining a non-executive position. The matter is of particular importance, as the pension industry had previously believed that one could retire in such circumstances. While the High Court has confirmed this belief, the Revenue has appealed the decision to the Court of Appeal.
Background
Mr Venables was chairman, executive director and a substantial shareholder in V Ltd, the holding company of a group which he established and had worked in for more than 30 years. He wanted to hand over management of the business to his children, because of concerns about his health and a desire to pursue a more relaxed lifestyle. He retired as an executive director on 30 June 1994, when he was 53, and became an unpaid non-executive director of the group. After 30 June, Mr Venables was no longer actively involved in the day-to-day running of the business, and spent considerable periods of time abroad. He did, however, maintain his shareholding, and continued to be interested in the running of the company, for instance providing advice and assistance to the board of directors on financial and commercial issues.
The group had established an approved Revenue pension scheme in 1980 and, under the scheme rules, Mr Venables was entitled to retire after the age of 50 and take a tax-free lump sum, which he did in fact take.
The Revenue raised an assessment to tax the lump sum payment, contesting that Mr Venables had not retired because he still held a post as a non-executive director. Despite his having taken on a substantially reduced role, the Revenue argued that if an individual retained any directorship in a company he could not be said to have retired.
It is this argument which gives rise to considerable concern among many owner managed businessmen with Revenue approved company pension schemes. It is widely believed that Mr Venables is far from alone in this situation, since until recently it was generally accepted within the pension industry (and perhaps even the Revenue) that a non-executive directorship could be retained without affecting the individual's retirement status.
The matter was taken to the Special Commissioners who found in favour of Mr Venables on this main point, but raised a different and rather disconcerting matter relating to the interpretation of the pension scheme's trust deed. The Special Commissioner concluded that although Mr Venables had retired, he was not in 'normal health' when he had done so, and therefore failed the requirement contained in the pension scheme's trust deed 'that he could retire while in normal heath prior to his normal retirement date'. The findings of the Special Commissioner appeared to produce the unintended result that an ill or disabled employee aged over 50 was not permitted to retire early. (The High Court subsequently overturned this aspect of the Special Commissioners' decision, and the Revenue has accepted the decision of the High Court.)
The High Court decision
The Revenue appealed against the primary Special Commissioners' finding to the High Court. The High Court accepted the Revenue's argument that a mere reduction in workload does not necessarily constitute retirement. However, on the facts of this case, it agreed with the Special Commissioner in finding that Venables had retired, despite retaining a non-executive directorship, stating that:
'In this case there was substantial evidence on which the Special Commissioner came to his conclusion that Venables had retired. He was previously working in effect as managing director for 50 hours a week. There was evidence that he was anxious to give up work because of concerns about his health. There was some direct evidence that he had been remunerated, and substantial indirect evidence from the size of the pension payments. His activities thereafter could be regarded as those of an interested and knowledgeable shareholder who had built up the business, who (with his family trusts) was a controlling shareholder, and who was keen to preserve the value of the holding, and whose advice was respected by those who carried on the business. There was sufficient evidence for the Special Commissioner's decisions on the facts, and in these circumstances there are no grounds for interfering with it.'
The current position
The Revenue has appealed against the High Court decision, but only in connection with the main issue of retirement while retaining a non-executive directorship. With two successive victories, at this point, the taxpayer has reason to believe there is a very good chance that a favourable decision will prevail.
As the taxpayer's advisers in this case, we would be pleased to receive any information or support from other taxpayers, or interested parties, who find themselves affected by this issue.
C W Fellowes Ltd is a practising firm of chartered accountants based in Winchester, Hampshire specialising in business and taxation advice, website: www.cwfellowes.com. Enquiries may be made to advice@cwfellowes.com or by telephoning 01962 870544 for the attention of the specialist tax unit.
