A Retiring Nature

A lump sum was not paid on retirement in Venables and Others v Hornby (Inspector of Taxes).

WHERE AN EMPLOYEE'S services had not clearly ceased, he was held not to have 'retired' for the purposes of receiving a tax free lump sum from the firm's pension scheme under section 596, Taxes Act 1988.

Background

Mr Venables, who was born in 1940, was the executive director and chairman of Ven Ltd. By 1994, when he was 53, his workload had substantially increased as a result of the recent retirement of the company's managing director and his health was causing concern he was overweight, had high blood pressure and was mildly diabetic. It was therefore decided that he would retire as an executive director to pursue other interests, 'but will continue as an unpaid non-executive director'. His normal retirement date would have been 13 December 2000, but the firm's Inland Revenue approved pension scheme did allow payments to be made to employees retiring on or after the age of 50 provided that they retired 'in normal health'. The court did note that this seemed a little odd as schemes normally allowed early retirement as a result of ill health, but it was confirmed that the conditions were as stated and that this had been approved. The scheme allowed part of the pension to be commuted to a lump sum, equivalent to 150 per cent of final salary and payments in excess of £500,000 were made to Mr Venables in July and August 1994. A lump sum paid from an approved scheme to a person on retirement would not normally be taxable as provided by section 596(1), Taxes Act 1988. In this case, the payments were in fact taken in the form of property, as there was little cash in the scheme; the taxpayer felt that there was little point in selling the properties, when he could have the same value without doing so.

The Revenue issued assessments:

• on the company under Regulation 49 of the Income Tax (Employments) Regulations SI 1993 No 744 charging income tax at the basic rate; and


• on Mr Venables under section 600, Taxes Act 1988 charging tax at the higher rate. (Section 600(4) brings transfers of assets, etc. into the charge to tax as payments.)

The company and Mr Venables appealed and it was agreed that these assessments would 'stand or fall together'.

Section 600 stated that:

'(1) This section applies to any payment to or for the benefit of an employee, otherwise than in course of payment of a pension, being a payment made out of funds which are held for the purposes of a scheme which is approved ...;

(2) If the payment is not expressly authorised by the rules of the scheme the employee shall be chargeable to tax on the amount of the payment under Schedule E for the year of assessment in which the payment is made.'

'Employee' included 'any director of the company'. Two issues arose.

• Were the payments 'expressly authorised by the rules of the scheme'?


• If they were not, could they be treated as held on trust by Mr Venables and treated as not paid for tax purposes, as they were repayable to the pension scheme?

Before the Commissioners ([2000] STC (SCD) 579) it was held that Mr Venables had retired but, as he was not 'in normal health', the payments were not authorised.

In the High Court, the judge agreed that Mr Venables had retired, but considered that 'high blood pressure and mild diabetes are common conditions in overweight middle-aged men and there was no finding that his health was abnormal'. He also said that 'not only was the taxpayer spending 50 hours a week as an executive director at the time of his resignation, which suggests strongly that he was fit to do the job, but there was no evidence to suggest that he was unfit to do it'. The payments were therefore authorised and should be tax-free. The Revenue appealed, arguing that the taxpayer had not retired and therefore the payments were not 'expressly authorised by the rules of the scheme' (section 600(2)).

(Timothy Brennan QC for the Revenue; Conrad McDonnell for the taxpayer and the trustees.)

Judgment in the Court of Appeal

It was first noted that, from the construction of the retirement scheme, it was always intended that it should be approved by the Revenue.

The main question was whether Mr Venables had retired; could he have retired if he still continued as a director? The purpose of the scheme was to provide 'relevant benefits' within the meaning of Taxes Act 1988, and paragraph 2 of Schedule F of the scheme's trust deed allowed these to be paid on early retirement.

Retirement

To determine what exactly is meant by 'retirement', Lord Justice Chadwick worked through several steps.

First, noting that 'relevant benefits' in section 612(1), Taxes Act 1988 distinguished between 'benefits given on (or in anticipation of) retirement' and benefits given 'on or in anticipation of or in connection with any change in the nature of service of the employee in question', he considered that the only meaning that can be given to the expression retirement is 'cessation of service'.

Secondly, what is meant by the definition of 'service' (also in section 612(1)) as 'service as an employee of the employer in question'? The section goes on to say that 'other expressions, including retirement shall be construed accordingly'. Holding the office of director is an employment and this cannot therefore cease while such office is held. Consequently, if a payment is made under a pension scheme to an executive director who, for example, continues as a non-executive director, this could only be in connection with a change in the nature of the service, not on retirement from service.

Thirdly, was there anything in the scheme rules to suggest that 'retirement' should be understood in a different sense from 'cessation of service', e.g. to include a change in the nature of the employee's service. The scheme did not provide a definitive answer and Lord Justice Chadwick considered that in certain circumstances if an employee's service was confined to a particular role, he could retire, but continue in a different role. However, in Mr Venables' case there was no such limiting contract of service.

Consequently, it was held that the payments were not authorised by the pension scheme rules because they were not made to a member who retired or whose particular service had ceased.

Were payments made?

The argument had been advanced by the taxpayer that no payment had actually been made. This was on the basis that if the payment was not authorised by the trust rules, then he was not entitled to it and the money remained subject to the scheme trusts. The case of Hillsdown Holdings plc v Commissioners of Inland Revenue [1999] STC 561 was quoted in support. In that case Hillsdown took over the FMC group of companies. Surplus assets from FMC's pension scheme were transferred to the Hillsdown pension scheme which consequently had a surplus, which was repaid to Hillsdown, net of a tax charge under section 601, Taxes Act 1988 ('charge to tax: payments to employers'). A member of the FMC scheme challenged the payment. This was upheld and the gross amount was repaid. The court held that the Revenue should repay the tax deduction to Hillsdown on the basis that the payment was not effectively paid.

Lord Justice Chadwick distinguished the Hillsdown case on the basis that, there, the payment was unauthorised and thus should not have been treated as a payment under section 601 at all. In this case, the whole point of section 600 was that it imposed a tax on payments that were unauthorised and in breach of trust. (Section 600 is entitled 'charge to tax: unauthorised payments to or for employees'.) If an unauthorised payment were then held to be no payment, it would defeat the whole point of the section. In the High Court, it had been held that the 'no payment' argument might be allowed if:

(1) the payment was in breach of trust;

(2) the recipient was accountable to the trustees as an actual or constructive trustee; and

(3) the recipient was able and prepared to account to the trustees.

Lord Justice Chadwick did not think that this was a viable argument and illustrated this with an example whereby the question of whether a liability could or should arise under section 600 would then depend upon whether the recipient was in a position to make repayment to the scheme. What, for example, would be the position if he had spent the money? Presumably the third condition mentioned above is not satisfied and a section 600 assessment is then valid. If he subsequently receives a windfall and can (and is willing to) make repayment, is the assessment no longer valid? What then if, before making the actual payment, he falls on hard times? Such a scenario could not have been Parliament's intention.

Decision for the Revenue

(Reported at [2002] STC 1248.)

Commentary by Richard Curtis

This was a case, the facts of which seem a little strange from the outset. In the High Court, the fact that the pension scheme's trust deed did not apparently allow early retirement on the grounds of ill health, while allowing it 'in normal health' was seen as a casus omissus, an omission by mistake. It appears that approval for the scheme was originally given by the Revenue on a discretionary basis under (what is now) section 591(1), Taxes Act 1988 because the power to pay benefits on early retirement in normal health did not meet the requirements of paragraph 1 of Schedule 5 to the Finance Act 1970. In fact, the Revenue withdrew approval for the scheme on 5 August 1994, the day after the final payment had been made to the taxpayer.

There was also the conflict between the Commissioners and the courts regarding the state of the taxpayer's health. Was a twenty-one stone man who suffered from heart problems and diabetes in 'ill health', or was this normal for a businessman in his fifties? In the event, the fact that he continued as a non-executive director meant that he had not (in the absence of any contract having come to an end) actually retired from service, and the tax consequences naturally followed. Those in similar circumstances, and one would imagine that the facts of the case are not unusual, should check the contractual issues relating to any proposed retirement to ensure that a clear 'cessation of service' does take place. The judge's comments on the possible implications of 'unauthorised' payments would seem to close the door on the possibility of escaping a tax liability by making repayment to the pension scheme if they seemed likely to suffer a successful section 600 attack by the Revenue. Although, that said, there might be a slight chink of light in Lord Justice Chadwick's closing comment.

'What the position would have been if Mr Venables had repaid to the trustees the moneys paid to him before any assessment had been made does not arise for decision in the present case.'

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