Tribunal confirms that HMRC failed to use the correct test in HICBC case

In Nicky Howard-Ravenspine v HMRC [2023] UKFTT 00471 (TC), the First-tier Tribunal (FTT) allowed a taxpayer's appeal against an assessment for the High Income Child Benefit Charge (HICBC), because a severance payment from the taxpayer's employer should have been treated as largely exempt from income tax under the disability exemption.

Background

Nicky Howard- Ravenspine (the taxpayer) had suffered from ill-health since June 2012. From December 2012, she received benefits under her employer's Permanent Health Insurance scheme. The employer was reluctant to continue to make regular payments and so following discussions with her employer, the taxpayer agreed to a termination agreement in April 2016, which brought her employment to an end. The termination agreement recorded that as a result of the taxpayer's ill health, the parties had concluded that the taxpayer was unable to return to her post and was unlikely to be able to do so for the foreseeable future. The employer agreed to make certain payments. One of which was a severance payment of £93,357 as compensation for loss of office and termination, of which £83,907 was a Group Income Protection (GIP) claim payment to settle an ongoing claim under the GIP, where the employee met the definition of incapacity.

HMRC assessed the taxpayer for £2,501 in HICBC, on the basis that her adjusted net income for the tax year 2016/17 was more than £50,000 and was not therefore entitled to child benefit of that amount which she had claimed.

The taxpayer appealed the assessment to the FTT.  The issue to be determined by the FTT was whether a payment made to the taxpayer by her employer fell within the disability exemption in section 406(1)(b), Income Tax (Earnings and Pensions) Act 2003 (ITEPA). 

FTT decision

The appeal was allowed.

The FTT considered that HMRC had incorrectly understood Mr Justice Lightman's interpretation of the predecessor legislation to the disability exemption, as set out in Horner v Hasted [1995] BTC 343. In particular, the FTT noted that HMRC had incorrectly treated the second test as an 'all or nothing' test. HMRC's position was that the entirety of the severance payment was compensation for loss of office, was therefore not paid on account of the taxpayer's disability and nothing else, and therefore fell outside the ambit of the disability exemption. However, construing the legislation purposefully, in the FTT's view, the purpose of the disability exemption is to exempt from tax any payment which is made on account of a disability irrespective of whether other payments are being made to the employee as part of the same agreement.

The FTT considered that the severance payment, although expressed as being paid as compensation for loss of office and termination, was being made, in part at least, because of the taxpayer's ill health. The evidence, which included a letter from the taxpayer's employer showing a breakdown of the payments made under the settlement agreement, recorded that £83,907 of the severance payment was paid on account of disability. 

The FTT therefore concluded that £83,907 of the severance payment benefited from the disability exemption and should not have been included in the taxpayer's adjusted net income for the purposes of the HICBC. Accordingly, the taxpayer's adjusted net income was less than £50,000 for the relevant year and no HICBC was due.

Comment 

This decision provides helpful clarification as to the correct test to be applied when determining whether the disability exemption, contained in section 406, ITEPA, applies. It also provides another instance where the FTT has considered the wording of the relevant legislation and rejected HMRC's incorrect interpretation of the law, as set out in its guidance. 

The decision will also be of assistance to other taxpayers in a similar position to the taxpayer in this case. 

The decision can be viewed here.