Payments are not gratuities

The taxpayer company set up two employee benefit trusts. Another firm bought the taxpayer in 2001 and the trusts were wound up.

There was a large amount of cash in the trusts as a result of the sale and the exercise of share options by employees before the sale. The trustees decided to distribute the cash to the employees. Income tax was deducted but National Insurance (NI) was not.

HMRC said the taxpayer was liable to pay primary and secondary NI in respect of the payments. The taxpayer appealed claiming they had been payments in respect of gratuities within para 5 of Pt X of Sch 3 to the Social Security (Contributions) Regulations 2001 SI 2001/1004 and were therefore exempt.

The First-tier Tribunal allowed the taxpayer’s appeal. The Revenue appealed to the Upper Tribunal which said the First-tier Tribunal had erred in law.

The...