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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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The benefits code: benefits and fair bargain: Mairs v Haughey: Wilson v Clayton

Section 201(2) ITEPA 2003

Although the definition of “benefit” in Section 201(2) is extremely wide (EIM21002), it does not cover everything that may be provided by an employer to someone who happens to be an employee or director of that employer.

As a general principle, a benefit must provide an element of “special bounty” to the recipient. In other words the employee must get something over and above what the employer gives as a fair bargain, or would be prepared to give as a fair bargain, to a member of the public, or other independent third party, dealing on arms length terms with the employer. What is a fair bargain?

Fair bargain - Mairs v Haughey (66TC273)

The principle of “fair bargain” in relation to a benefit arose in the case of Mairs v Haughey, which concerned a payment to an employee in return for giving up rights under an enhanced redundancy scheme. The Special Commissioners held that the payment was not a benefit because it did not overvalue the employee’s contingent right to receive a payment from the scheme:

“Section 154 [ICTA1988] brings benefits into charge. All kinds of benefits are covered; but whatever they are, they must be capable of being described as “benefits”. The legislation is aimed at profits ……. which escape mainstream ….. provisions for one reason or another. It is not aimed at receipts resulting from fair bargains.”

In the Court of Appeal (Northern Ireland) Lord Chief Justice Hutton supported the Commissioners’ view:

“The respondent received the payment …. in return for surrendering his contingent right to receive payment under the enhanced redundancy scheme and the Special Commissioners held that the payment did not overvalue that right. Therefore I consider that the Respondent did not receive a “benefit” …. where the money received was paid to him by way of fair bargain, in consideration of his surrender of a right to receive a larger sum on the event of the contingency of redundancy occurring.”

Therefore something provided by an employer, on identical terms both for employees and for the general public (for example, “free” refuse collection or state education), does not become a benefit within the legislation simply because it is provided for people who happen to be employees of that employer. The employees receive on the same terms exactly what they would have received if they had not been employees. That indicates that what they get is a fair bargain and there is therefore no “benefit”.

It is not necessary that the employer actually does deal with members of the public for this principle to apply. If an employer provides something to an employee, and they would be prepared to provide it to any member of the public on exactly the same terms, then that is a fair bargain and not a benefit.

Wilson v Clayton (TCL 3745)

This case concerned an employee who was dismissed by his employer for failing to agree to withdrawal of his entitlement to an Essential Car User Allowance (ECUA). He was immediately re-employed on the same terms except that he was no longer entitled to receive ECUA. An Employment Tribunal found that he had been unfairly dismissed and ordered the employer to reinstate the ECUA, and to pay him the arrears of ECUA due since it had been withdrawn. The Tribunal also ordered the employer to pay him a “Basic Award” of compensation.

Under the Employment Rights Act 1996 the Tribunal had no authority to order the compensation payment but the employer paid it. Arguably the payment to the employee was a pure windfall to him as it had no statutory basis and the employee was not entitled to receive it. Nevertheless the employer paid it in order to avoid further litigation and consequently it was paid as part of a genuine compromise agreement made at arm’s length.

The Court of Appeal held that in these particular circumstances the payment of compensation was not a benefit, as it represented a “true bargain” between employer and employee. Gibson, LJ held that –

“Where parties at arm’s length arrive at a genuine compromise in settlement of hostile litigation, it would be an extremely difficult task for any tribunal or court to unpick the constituent parts of the bargain and to put a value on those parts.”

Consequently the value of the “bargain” agreed by an employer and an employee in a genuine compromise agreement at arm’s length is not generally relevant to determining whether the bargain represents a “fair bargain”. But this principle does not apply where, as Gibson LJ set out,

“the reason for the payment was to confer a gratuitous benefit within a compromise agreement.. .”

Following Wilson v Clayton, where it is claimed that the payment represents a fair bargain, you must investigate carefully the reason for a payment made as a result of a compromise agreement at arm’s length. If it was a genuine compromise agreement it will probably be a fair bargain. On the other hand, if it was intended purely to provide a benefit, it will be chargeable as such. The decision does not have any read across to payments made under a compromise agreement not made at arm’s length.