AD Bly Groundworks and Civil Engineering Limited & Anor v The Commissioners for HMRC
[2024] UKUT 104 (TCC)
The Commissioners for HMRC v E.ON UK Plc
28 November 2023
[2023] EWCA Civ 1383
Court of Appeal
A company offered its employees money to agree to pension changes. The court decided the money was taxable income because it was payment for agreeing to work under new terms, not compensation for lost pension benefits.
Key Facts
- •E.ON UK plc agreed to change its defined benefit (DB) pension scheme to reduce costs.
- •Scheme members were offered an 'integrated package' including a Facilitation Payment (7.5% of salary, minimum £1000) in exchange for agreeing to the changes.
- •HMRC assessed income tax and NICs on the Facilitation Payments, except one to Mr Brotherhood.
- •E.ON appealed, arguing the payment was compensation for loss of pension rights, not earnings from employment.
- •The FTT upheld HMRC's assessment; the UT overturned it; HMRC appealed to the Court of Appeal.
Legal Principles
Whether a payment is 'earnings from employment' for income tax and NIC purposes.
Income Tax (Earnings and Pensions) Act 2003, s.9(2); Social Security Contributions and Benefits Act 1992, ss.3(1), 6.
Tilley v Wales: A lump sum received in exchange for releasing a right to a pension is not taxable as an emolument.
Tilley v Wales [1943] AC 386
Hunter v Dewhurst: Release of a contingent liability is not remuneration.
Hunter v Dewhurst (1932) 16 TC 605
Mairs v Haughey: The tax treatment of a payment in lieu of a contingent liability is usually affected by the tax treatment of the payment it replaces.
Mairs v Haughey [1994] 1 AC 303
Payments made as an inducement to provide future services on different terms are taxable as earnings.
Shilton v Wilmshurst [1991] 1 AC 684
Outcomes
Court of Appeal allowed HMRC's appeal.
The Facilitation Payment was an inducement to agree to changes in future employment terms, not compensation for loss of existing rights. Tilley v Wales did not apply; the payment was from employment.
Upper Tribunal allowed E.ON's appeal.
The Upper Tribunal found that the First-tier Tribunal had misapplied Tilley v Wales by interpreting it too narrowly; the payment was compensation for a diminution in the practical value of expected future pension benefits.
First-tier Tribunal dismissed E.ON's appeal.
The FTT concluded that the Facilitation Payment was an inducement to provide future services on different terms and therefore taxable.