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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employment income: earnings from employment: more than one reason for the payment

From the employment

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Kuehne & Nagel Drinks Logistics Limited, Mr A Scott, Mr A C Joyce v HMRC (“KNDL”)

To be taxable as earnings within Section 62 ITEPA 2003 a payment must come from the employment (see EIM00600).

The KNDL case concerned the transfer of employees from their existing employer to a new company. Under the Transfer of Undertakings (Protection of Employment) (“TUPE”) Regulations most of the employees’ employment rights are retained but one exception is the nature of the occupational pension scheme offered by the new employer. The scheme offered by KNDL was perceived to be less attractive in terms of future pension expectations (accrued pension entitlement was not affected) than the scheme provided by the previous employer. The employees expressed concern about this aspect of the transfer to the extent of threatening industrial action and subsequently received an amount funded by the old employer but paid by the new employer in 2 instalments to settle the dispute.

Under statutory provisions concerned with appeals, the judge in the First-tier Tax Tribunal (FTT) is entrusted with the function of making findings of primary fact and proper inferences of fact based on consideration of all the relevant documents and oral evidence before then applying the tax legislation in accordance with precedent established in case law.

In KNDL Judge Hellier in the FTT held that:

“To my mind it cannot be said either from the employees’ or employers’ perspective that the only reason the payments were made was either solely in compensation for the pension changes, or solely in order to achieve a smooth transfer (i.e. avoiding industrial action and having employees working willingly in the new venture). Both these reasons were bound together: ….. It can no more be said that the employers did not make the payment to compensate the employees than it can be said that the employees did not take the payment for not disrupting the transfer by taking industrial action. I conclude that the payments were made and received both (i) in order to compensate for loss of pension expectations; and (ii) to ensure a “smooth transfer”; and that such was the understanding of all parties.”

He concluded that he had to apply the tax legislation to “a payment which was made for two reasons which were not dissociable.”

In the Court of Appeal, Counsel for the appellants argued that the reasons found by the FTT judge were capable of being weighed up against each other or otherwise ranked. However, Mummery LJ held that:

“All I need say at this point is that the use of “from” in the idea expressed in the statutory expression “earnings from an employment” and “earnings derived from an employment” [the statutory words for NIC purposes] in a fiscal context indicates, as a matter of plain English usage, that there must, in actual fact, be a relevant connection or a link between the payments to the employees and their employment.”

And that:

“… the relevant “weighing up” exercise which was emphasised in the appellants’ submissions was in fact properly carried out by Judge Hellier at the correct stage, that is when he evaluated the evidence and reached his conclusions of the facts relevant to the question whether the payments were emoluments from employment. There was no further exercise of weighing up the two “dissociable reasons” for the payment which the judge was required to conduct in order to answer that question. He had already answered the statutory question by finding that the threat of industrial action was a substantial cause of the payments. The sufficiency of that finding of necessary relevant connection or link between the emolument and the employment is not cancelled out or diminished by the finding or the presence of another factor, such as the pension compensation for loss of a right unrelated to an emolument from employment.”

Patten LJ explained the point further as follows:

“If the employment is a substantial and equal cause of the payment, it becomes open to the judge to say that the statutory test is satisfied. The payment is then from the employment even if it is also substantially attributable to a non-employment cause.”