Former shareholder’s payments to employees were taxable

In OOCL UK Branch v HMRC [2023] TC09007, the First Tier Tribunal (FTT) found that payments made to employees, funded by a company’s former majority shareholder out of sale proceeds as a gesture of thanks, were made by reason of employment. PAYE and NICs applied.

• OOCL was an international container shipping company, of which Mr CC Tung took over as chairman and majority shareholder in 1996.
• In July 2017, OOCL received a takeover offer. On 24 July 2018, Mr CC Tung’s interest in the company was sold and he resigned as a director on 3 August 2018.
• On 2 August 2018, Mr CC Tung sent an e-mail to all 10,300 global employees. In this, he announced a ‘special discretionary payment’ would be made to individuals employed by OOIL and its subsidiaries.
  • This payment was funded by the Tung family and distributed through OOIL, as a payment agent.
• The payments to 99 UK employees were made in September 2018.
  • Each employee’s payslip showed the gross sum as a ‘bonus’ and deducted PAYE and National Insurance Contributions (NICs).
  • On average, the payments were 50% of each individual’s salary. There was some correlation between salary/length of service and bonus, but the precise calculation was not clear.
  • Mr CC Tung reimbursed OOCL the full gross value of the payments and the employer’s NICs.
• Following a review by the OOCL finance team, Earlier Year Updates were submitted in August and September 2020 seeking repayment of the PAYE and NICs paid, on the basis that the payments were not emoluments 'from' employment and were not 'paid by reason of' employment.
• In November 2021, HMRC issued Determinations totalling £589,000.
• OOCL Appealed to the First Tier Tribunal (FTT).

The FTT found that:

• The use of OOCL’s payroll to make the payments was an administrative convenience.
• There was no significance in the use of the term 'bonus' on the payslip.
• It was not relevant that Mr CC Tung met the cost of the employer NICs.
  • He was clear that the Tung family would meet the cost of the payments.
  • Meeting the employer’s NIC cost without enquiring about NICs' liability was not indicative that he considered the payments to be either 'from' employment or 'by reason of employment'.
• The payments were not income 'from' employment and were therefore not taxable under s.62 ITEPA 2003.
  • The payments were not made for past or future services rendered by the employees.
  • Employment was not the immediate cause of the payments.
  • The payments were non-contractual, voluntary and not expected. They exceeded typical performance-related bonuses previously paid by OOCL and they would not be repeated. They did not make good a below-market salary.
• The payments were made by reason of employment: employment was a cause of the payments being made.
  • To receive a payment, a recipient had to be an employee.
  • The payments were calculated by reference to length of service and salary.
  • Mr CC Tung was the chairman and majority shareholder of the recipients’ employer. This relationship was significant. 

The appeal was dismissed.

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External link

OOCL UK Branch v HMRC [2023] TC09007