Tribunal Decision Clarifies Tax Treatment of Third-Party Payments to Employees

Citation: [2023] UKFTT 996 (TC)
Judgment on

Introduction

The First-tier Tribunal (Tax Chamber) decision in OOCL UK Branch v The Commissioners for HMRC [2023] UKFTT 996 (TC) addresses the tax liabilities of payments made by a third party to employees. The tribunal explored whether these payments constitute earnings from employment or are taxable under the benefits code. A systematic evaluation of both the applicable law and the facts led to a decision that significantly impacts the treatment of similar payments in UK employment and tax law.

Key Facts

OOCL, a shipping company, underwent a takeover resulting in significant financial gains for its chairman and majority shareholder, Mr. CC Tung. To express appreciation for the workforce’s contribution to the company’s success, Mr. Tung made a discretionary payment to employees, which he personally funded following the sale. The payment was processed through the company’s payroll system as “Bonus” and was subject to PAYE income tax and National Insurance Contributions (NICs). OOCL later contested the tax treatment of these payments.

The tribunal analyzed the nature of these payments, questioning whether they were earnings “from” employment according to ITEPA sections 9 and 62, or if they were benefits “by reason of” employment under ITEPA section 201. Additionally, the payments’ relevance to NICs under SSCA section 3 was examined.

The tribunal applied several legal principles to reach its conclusion:

  1. Earnings from Employment: A key question was whether the payments were for services rendered as part of the employment. Past cases such as Collins v HMRC and Shilton v Wilmshurst provided guidance on when payments not contractual in nature could still be treated as earnings “from” employment. The crucial factor is whether employment is the “causa causans” (the principal cause) rather than simply the “causa sine qua non” (a necessary condition).

  2. Benefits Code: The payments were scrutinized against ITEPA section 201, which concerns employment-related benefits. The section deems a benefit provided by an employer as by “reason of employment” unless specified otherwise, extending the scope to third-party payments. The Wicks v Firth and Mairs v Haughey judgments informed the assessment of whether the benefit had an employment-based causation.

  3. National Insurance Contributions: The SSCA was relevant for NICs, where “earnings” include any remuneration “derived from employment.” The outcome on the taxability of the payments under ITEPA would consequently bear on NICs liabilities.

  4. Operative Reason: Determination hinged on establishing the operative reason for the payment. According to guidance provided by Vermilion Holdings Limited and John Charman v HMRC, a benefit does not need to be solely or dominantly because of employment; it suffices that employment was a condition of the Payment being granted.

The tribunal also considered the guidance from HMRC and existing case law on factors that could point to a payment not being from employment, such as non-contractual, unexpected, non-recurrent nature of the payment, and no correlation to market salary rates.

Outcomes

The tribunal held that the payments were not earnings “from” employment under ITEPA section 62. Employment was not the principal cause of the payments; instead, they were seen as acts of generosity and appreciation from Mr. Tung, separate from the payroll and performance compensation structure of OOCL.

However, under the benefits code (ITEPA section 201), it determined that the Payments were indeed made “by reason of” employment as employment was an operative reason for the granting of the Payment, fulfilling the deeming provision when third-party payments are concerned. Consequently, the payments were subject to income tax and class 1 NICs, which led to the dismissal of OOCL’s appeal.

Conclusion

The tribunal decision in OOCL UK Branch v The Commissioners for HMRC clearly delineates the criteria for determining the taxability of non-contractual payments made to employees by third parties. The distinction between earnings “from” employment and “by reason of” employment underlines the complexity of employment-related tax considerations. Despite recognizing the generous nature of the payments, the tribunal concluded that their connection to the recipients’ employee status necessitated tax liabilities. The ruling affirms the nuanced approach the UK tax law mandates for employment income, emphasizing the tax implications of administrative convenience and the operative reasons behind non-contractual payments.

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