Payments to employees were by reason of employment

The taxpayer was an international container shipping company. The chairman and majority shareholder – Mr Tung - sold the company in August 2018 and made a ‘special discretionary payment’ to each of the employees. This was funded by his family but distributed through the company. The UK employees received their payments in September 2018. Each employee’s payslip showed the gross sum as a ‘bonus’ with deductions for PAYE and National Insurance.

On average the payments were 50% of each individual’s salary. There was some correlation between salary and length of service and bonus but they did not seem to be made according to a specific formula.

The company submitted earlier year updates claiming repayment of the PAYE and NICs paid on the basis that the payments were neither emoluments from employment and nor paid by reason of employment.

HMRC disagreed and said the payments were subject to PAYE and National...