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JOHN T NEWTH and ALLISON PLAGER summarise some recent cases heard by the Special Commissioners.
Relief in redundancy
The appellant company had carried on manufacturing businesses from various sites and through different divisions in Scotland. However, in August 1997 the entire share capital of the company was purchased by Fullarton Computer Industries Limited.
JOHN T NEWTH and ALLISON PLAGER summarise some recent cases heard by the Special Commissioners.
Relief in redundancy
The appellant company had carried on manufacturing businesses from various sites and through different divisions in Scotland. However, in August 1997 the entire share capital of the company was purchased by Fullarton Computer Industries Limited.
Following rationalisation, two of the appellant company's divisions were closed and one hundred employees were made redundant. Following announcement of the plans, negotiations were made with the appropriate trade union, the AEEU.
Subsequent staff notices were issued to employees showing the terms on which redundancy would take place. For the two sites concerned the payments made to employees contained, in each case, £2,500 in recognition of any entitlements under the consultation process referred to in section 188, Trade Union and Labour Relations (Consolidation) Act 1992.
It was the view of the Inland Revenue that each payment of £2,500 was an emolument under section 19, Taxes Act 1988 and a determination was made under Regulation 49, Income Tax (Employments) Regulations 1993 in respect of emoluments totalling £150,000 on which the tax was £34,500.
The company appealed to the Special Commissioner, Stephen Oliver QC, and the hearing took place in London. On behalf of the Inland Revenue it was argued that the payments were made to employees in recognition of the company's contingent obligations under section 192, Trade Union and Labour Relations (Consolidation) Act 1992 which, together with section 190, formed part of the contractual relationship between the company and its employees. Payments made under section 192 are expressed as remuneration; consequently payments, such as the £2,500 made to each employee made in substitution for section 192 remuneration were, on the strength of a decision in the House of Lords in Mairs v Haughey [1993] STC 569, to be treated as such.
If the payments were not made in pursuance of the company's contractual obligations to the employees, they were at least so directly connected with their employments and so much part and parcel of the employer-employee relationship (see Mr Justice Knox in Hamblett v Godfrey [1987] STC 60 as to make the payments arising 'from the employment' (see Lord Radcliffe in Hochstrasser v Mayes 38 TC 693).
The company argued that the amounts paid were redundancy payments. They were not paid in accordance with any contractual rights embodied in the employment contract. For that reason the payments were not taxable as emoluments within section 19, Taxes Act 1988.
The Special Commissioner first of all considered whether each payment of £2,500 was made 'in return for acting or being an employee' or in Lord Templeman's words in Shilton v Wilmshurst [1991] STC 88, were they paid to each of them 'for being or becoming an employee'?
The critical issue therefore, was whether, assuming the £2,500 to have been paid as a protective award, this amount would have ranked as an emolument from the recipient employee's employment. The Special Commissioner considered various sections in the Trade Union and Labour Relations (Consolidation) Act 1992, and in particular sections 188 and 189. He came to the conclusion that drawing the threads together it seemed to him that a protective award, if made, would not rank as an emolument within section 19, Taxes Act 1988. In coming to that finding, he did not consider that the decision in EMI Group Electronics Limited v Coldicott [1999] STC 803 assisted the Revenue.
As regards the argument for the Revenue, that irrespective of the actual terms of the contract of employment the rights under the Trade Union and Labour Relations (Consolidation) Act 1992 were at the very least directly connected with the employment, Mr Oliver considered Hamblett v Godfrey. His findings on this issue were that the right to the award arose because the employer and employee relationship had been terminated. The Trade Union legislation was a source of the protective awards, not the employer and employee relationship. Thus, had they been made, they would not have ranked as emoluments within section 19, Taxes Act 1988. Accordingly, each £2,500 payment should not be taxed as emoluments under section 19. If liability arose at all, it would be under section 154, Taxes Act 1988 but it does not appear that arguments on this issue had been presented by either side. Accordingly, the appeal was allowed.
Capital breeds capital
The appellant paid a single premium of £200,000 into an insurance policy (described as a capital redemption policy) with a Luxembourg company. It was designed as an inheritance tax planning product. At the start of the policy, he decided to effect annual partial surrenders of some £20,000 to be paid to him. He argued that these were capital payments within the provisions of sections 539 to 554, Taxes Act 1988, with the result that five per cent (£10,000) of the single premium was tax free each year, and the rest of the annual payment (£10,000) was a gain chargeable to income tax.
The Revenue argued that the whole of the annual payments were liable to income tax under Case V of Schedule D as annuity payments with a foreign source. This was because once fixed at the outset the policyholder's only right was to the annual withdrawals for the rest of his or her life, or until the underlying fund was exhausted. There was no right to surrender the policy in full, except after the death of the policyholder.
Basing her decision on the Court of Appeal decisions in Perrin v Dickson 14 TC 608 and Sothern-Smith v Clancy 24 TC 1, the Special Commissioner found that the £200,000 paid by the appellant was an investment of capital, received by the company and in due course to be repaid to the appellant. The transaction was therefore a deposit of a fund on the terms that the deposit be repaid, with an adjustment representing the variation in the value of the units. The company was never going to be involved in a possible liability which might exceed the original payment, however long the appellant lived. This led the Special Commissioner to say that the payment was not an annuity but was a deposit or investment which would be returned to the appellant or his personal representatives as a capital sum. The annual payments were therefore capital in nature, and taxable under sections 539 to 554. Thus £10,000 was tax free, and the balance subject to income tax.
The appeal was allowed.
Too late for section 380 losses
The taxpayer was in business as a haulier and a publican. The haulier business was profitable, but for the years 1992-93 to 1995-96 the taxpayer's publican accounts showed losses.
The Inspector agreed the losses, on the supposition that the losses would be relieved by being carried forward for set-off against profits in a subsequent year under section 385, Taxes Act 1988. The taxpayer, however, wished to offset the losses under section 380, i.e., against taxable profits for the same year.
The problem was that the taxpayer's section 380 claim was late. A claim for the 1995-96 loss should have been made by 5 April 1998, whereas the taxpayer made the claim in March 2000. The claims for the earlier year losses were made at similar times.
The Inspector can allow relief under a late section 380 by concession, but it is not within the powers of the Special Commissioner to extend the time limit, as the Inspector present pointed out. The Special Commissioner agreed with the Inspector that he had no jurisdiction in this matter, and said he could not help the taxpayer.
