Charitable chairman caught out by employment-related benefitsby
Generous payments made by a former chairman to his ex-employees were not earnings from employment but fell under the employment-related benefit rule as the only connection between the chairman and the recipients was through their employment.
Section 201 ITEPA 2003 gives a fairly broad definition of employment-related benefits as a benefit or facility of any kind, other than an excluded benefit, which is provided in a tax year for an employee by reason of the employment.
It is the last five words on which this case was decided.
The charitable chairman
Mr CC Tung had been the majority shareholder and chairman of Orient Overseas Container Line Limited (UK Branch) (OOCL) since 1947. In that time he was, by all accounts, a "hands on" chairman and a benevolent and generous employer, prone to bestowing lavish gifts on his workforce.
It was mentioned during the trial that Mr CC Tung had introduced a policy of rewarding 25 years of service by giving each employee a Rolex watch on reaching that milestone.
True to his magnanimous nature, when Mr CC Tung sold his shares and resigned from his position at OOCL, he made considerable payments of around 50% of individual salary to each of the approximately 10,300 global employees. These were made in the form of bonus payments and processed via the September 2018 payroll.
In the accompanying correspondence to the employees, Mr CC Tung made clear his intention that the cost would be borne entirely by the Tung family.
The email sent to the employees included the following extract:
"The Tung family wishes to express its appreciation for the long corporate journey we have had together by making a special discretionary payment to colleagues directly employed by OOIL and its subsidiaries, according to certain terms and conditions. Whether through good or challenging times, it is you, our people, united as a team under the OOIL banner and the ‘Take it Personally’ spirit, who have continued to deliver. This special discretionary payment will be funded by the Tung family, and distributed through OOIL, as payment agent, as a bonus."
The payslips provided to the individual employees showed the gross sum of the payments as “Bonus”. PAYE income tax and NIC were deducted and, in accordance with his intention to bear the full cost of the payments, Mr CC Tung paid OOCL the full gross value of the payments and the employer’s NIC.
However, the finance team later decided that the payments had not been made by reason of employment and should not have been subject to PAYE and NIC. After raising the issue with HMRC on 6 November 2018, the company sought repayment of £587,680 income tax and £284,051 NIC. HMRC disagreed.
Gift or reward for services?
The taxpayer argued that the payments were made, not by reason of employment, but as gifts by reason of the Tung family's substantial financial gain on the sale of the shares and desire to share some of that gain with the people who helped to make the company a success.
That the recipients received the money because they were employees was not enough, the taxpayer asserted, to connect the payments to past, present or future employment services.
HMRC contended that the payments were made "as a consequence of the recipients being employees and having contributed to the success of the business justifying the significant premium on share value which benefited Mr CC Tung".
In HMRC's view, the payments were made as a mark of appreciation for the services provided by each employee, and also in anticipation of continued service in the future under the company's new ownership.
Much weight was given by HMRC to the apparent, albeit imperfect, correlation between length of service, salary and amount received by each individual (although no clear formula or basis for the calculations had been made available so this was based on HMRC's analysis).
The wording of the email from Mr CC Tung to employees was another key element of HMRC's argument. In particular the use of the word "bonus" was considered significant by HMRC.
The first tier tribunal (FTT) agreed with this point, although it was noted that the missive would have been translated into many languages and may not have originally been written in English, so the word choice although relevant was not a determinative factor according to the judge.
Not 'from employment' but 'by reason of employment'
The FTT concluded that "the payments were made as an act of appreciation and as a mark of generosity by Mr CC Tung".
Listing many factors, including but not limited to the following, the FTT decided that the payments were not income "from" employment and thus not taxable under section 62 ITEPA.
The Payments were:
(a) non-contractual, voluntary and were not expected by the recipients;
(b) at 50% on average of annual salary and exceeding 5x the usual maximum performance related bonus they were disproportionate though not significantly so;
(c) not part of a regular pattern of payment and would not be repeated;
(e) the full cost of the payments was borne by Mr CC Tung and was stated to have been funded from the sums he received from the share sale, as such they could not have been made on that same basis by OOCL.
(The full list can be found in the judgment summary)
Nevertheless, taking into account extensive case law detailed in the judgment summary, the FTT concluded that the payments had been made "by reason of employment".
That the payments were made collectively to all of OOCL's c.10,300 global employees showed that Mr CC Tung could not possibly have had a personal relationship with each of the recipients and his only connection to them was their employment by the company.
Adding "we have found as a fact that the payments were calculated by reference to length of service and salary albeit that we do not know precisely how the calculations were undertaken", the judge dismissed the appeal and concluded that PAYE had been correctly charged on the payments by reason of employment under s201 ITEPA 2003.
By consequence, as had been accepted at the outset, NIC was also correctly paid by virtue of section 3 SSCA.
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Consulting Tax Editor for AccountingWEB.
I have spent the last 10 years teaching the accountants of the future, mainly ICAEW advanced level corporate reporting. I also cover tax news and write and edit tax updates for other publishers including PTP Limited.