Payments by third parties to employees

The FTT has held that a lump sum payment made to employees by the outgoing chairman of the employer on the sale of his interest in the company was not earnings from the employment but was nevertheless taxable as having been made by reason of employment: OOCL UK Branch v HMRC [2023] UKFTT 996.

The charging provision in ITEPA 2003 section 201 for employment related benefits provided for an employee by reason of employment merely requires the employment to be a condition or a reason of the payment. It is not necessary that the employment is the sole or even the main reason for the payment. In circumstances where the third party payment was made only to employees on the payroll and calculated (at least to some degree) by reference to their salary and length of service, it was an inescapable conclusion that the payments had been made by reason of employment.

Background

OOCL is an international container shipping company which was founded in 1947 by the Tung family. Mr CC Tung had been majority shareholder and Chairman since 1996. In 2018, an offer was accepted to buy OOCL from the Tung family and Mr CC Tung sold his shares and resigned as a director and Chairman.

In August 2018, a letter was sent to employees of OOCL from Mr CC Tung advising them that "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 OOCL. Subsequently, Mr CC Tung, acting through the corporate administration department, determined the amount that he wished to be paid to each individual employee and those payments were made through OOCL's payroll.

The payments were initially made subject to PAYE and NICs but following a review the company decided that the payments were not earnings from the employment nor were they paid by reason of employment and so sought to recover the PAYE and NICs. HMRC disagreed contending that the payments fell within ITEPA 2003 section 62 as earnings from the employment or otherwise were taxable as an employment-related benefit provided for an employee by reason of employment within section 201.

FTT decision

The FTT considered that it was clear that the payments were made by Mr CC Tung as a mark of appreciation to the UK workforce (as part of a gesture to of similar appreciation to the global workforce) following the successful sale of the business and in consequence of his long tenure as both chairman and majority shareholder of the OOCL. He did so as a personal gesture of thanks from the proceeds of sale. Mr CC Tung wanted to share the benefit he had derived from the share sale and wanted to recognise that the share value was a measure of the company and all that is in it, including the staff. The individual payments were determined by Mr CC Tung and the calculation of appreciation was determined by reference to both to annual salary and length of service, but not in a defined formulaic way.

In addition, it was agreed that the payments were: made voluntarily, not expected by the recipients, not customary, not paid in order to make good a below market salary otherwise paid to the employees but only made to those who were employees on 27 September 2018.

Were the payments from the employment?

Turning to the question whether the payments were from the employment, OOCL contended that the payments were clearly not made in respect of future services of employment, they were a simple act of generosity. HMRC argued that the payments were made as a consequence of the recipients being employees and having contributed to the success of the business. HMRC placed significant reliance on the correlation between length of service and salary on the amounts paid. The payments may have been voluntary and an act of generosity, but they were to reward services provided as employees.

The FTT considered that the payments were not "from" the employment. The payments were not made for the past services rendered as employees by the recipients and it could not be said that employment was the causa causans of the payments. Equally, the fact that they had been described as a "bonus" was not definitive.

Were the payment made by reason of employment?

However, the FTT agreed with HMRC that the payments were made by reason of employment.

HMRC had relied on dicta from Lord Denning in Wicks v Firth that "the words cover cases where ... the employee would not have received the fringe benefits unless he had been an employee. The fact of employment must be one of the causes of the benefit being provided, but it need not be the sole cause, or even the dominant cause.  It is sufficient if the employment was an operative cause - in the sense that it was a condition of the benefit being granted. ..."

The FTT had expressed concern that HMRC had relied on the Court of Appeal analysis in Wicks v Firth in circumstances in which the decision had been overturned by the House of Lords, albeit on alternative grounds and noted (with some immodesty perhaps) that whilst the parties had not been able to help with the FTT's concerns, the FTT's own independent research had led it to the Upper Tribunal judgment in HMRC v Vermilion Holdings Limited [2020] UKUT 162 on the meaning of "by reason of employment" in the context of section 471 (dealing with securities granted by reason of employment).

The Upper Tribunal stated that: "What we take from Wicks v Firth is that the phrase "by reason of employment" is to be given its ordinary meaning and must be considered in the circumstances of the particular case.  We note also that the employment need not be the sole reason: it is enough that the employment was a condition of a benefit being granted."

In this case, in order to receive their respective payment each recipient had to be an employee and payments were calculated by reference length of service and salary. The only relationship of substance or relevance between Mr CC Tung and the recipients collectively was that he was the chairman and majority shareholder of their employer. These factors were conclusive that employment was a cause of the payments being made. The fact that the payments represented a mark of appreciation and were entirely funded by Mr CC Tung did not preclude a conclusion that the payments were made by reason of employment.

The FTT also noted that the deeming provision in section 201(3) (that any payment by an employer is deemed to be made by reason of employment) carried the consequence that section 201(1) applies to benefits funded by third parties provided (as here) one of the operative causes or reasons for payment is employment.

Comment

The decision is a reminder as to the wide scope of section 201. Payments will be made by reason of employment where the employment relationship is a reason (even if it is not the main reason) for the payment. Employment simply needs to be a condition of payment to bring the payments within the scope of this charging provision.