In A G Reid v HMRC [2016] UKFTT TC04872 the First Tier Tribunal (FTT) found that part of a payment made to an employee on a TUPE transfer was non-taxable: it was compensation for loss of pension rights.
Mr Reid worked for BP for many years.
- In 2010 his employment was transferred to S & J D Robertson North Air Limited under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (a TUPE transfer)
- He received a payment of £25,396 from BP for the loss of rights to a reward and benefit scheme.
- He did not include this payment as part of his employment income on his 2010/11 Tax Return.
- Following an enquiry HMRC issued a closure notice adding this sum to his employment income.
- Mr Reid appealed this closure notice.
Although no numerical breakdown was explicitly provided to Mr Reid or to the tribunal, it was clear from correspondence that the payment was made up of different elements, being compensation for the loss of the expectation of:
- Pension rights
- Bonus rights
- Share scheme rights
- Lunch allowances
The FTT noted that there was no evidence of any other reason for the payment being made. In particular they rejected the suggestion that it was made as an inducement to accept employment with North Air.
The FTT decided that:
- Each element of the lump sum payment would retain the same character and be taxed in the same way as if Mr Reid had continued to receive the rights or payments that it related to.
- The payment for the loss of pension rights was derived from the additional pensions that Mr Reid expected to receive during his continued membership of the pension scheme, and not from his employment. It was therefore not taxable as earnings.
- No evidence was provided which would enable the tribunal to establish whether or not the share scheme rights related to a share incentive plan with an expectation of tax free benefits for Mr Reid. Mr Reid failed to discharge his burden of proof that this element of the payment should not be taxed.
- Mr Reid also failed to establish any reason why the bonus and lunch allowance elements of the payments would not be taxed as earnings.
The FTT directed that HMRC’s assessment would be reduced by the element of the payment which related to the loss of his pension rights. The original Framework Agreement for the TUPE transfer had provided a formula for calculating this sum.
Comment
The burden of proof in this case was with Mr Reid, and had he or his advisers provided sufficient information about the share scheme he was involved with then FTT may have been able to reach a different conclusion about this part of the payment.
The case also serves as a reminder that it is important to establish and document the precise nature of payments received from employers, as even if such payments are not explicitly broken down it could still be possible to establish that they are not fully taxable. See further TUPE cases in Termination, redundany and leaving payments.
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