Upper Tribunal agrees with the taxpayer on payments to secure changes to pension arrangements

In E. ON UK Plc v HMRC [2022] UKUT 196 (TCC), the Upper Tribunal (UT) found that a facilitation payment made for changes to pension arrangements was not subject to income tax and national insurance contributions

Background

E.ON UK plc (E.ON), a power and gas supplier, had a 'retirement balance' type of pension scheme of which 1,100 of its employees were members. Under the scheme, a notional amount is accumulated each year, which can be used on retirement to provide a lump sum and/or to pay a pension. The employee contributes to the notional amount by deduction from his salary, and the employer guarantees to make up the balance. 

In 2018, E.ON changed the arrangement and members of the scheme received a one-off lump sum as a 'Facilitation Payment' that amounted to 7.5% of their salary with a minimum payment of £1,000.

E.ON considered that the Facilitation Payments were exempt from income tax and National Insurance Contributions (NICs) because they were not "from" the employment, within the meaning of section 9(2), Income Tax (Earnings and Pensions) Act 2003 (ITEPA), and section 3(1), Social Security Contributions and Benefits Act 1992 (SSCBA). E.ON asked HMRC for a ruling to that effect but HMRC refused to do so as it did not agree with E.ON's analysis.

HMRC issued E.ON with a determination of £758, under Regulation 80, Income Tax (Pay As You Earn) Regulations 2003, in respect of the Facilitation Payment made to Mr Brotherhood (who acted as a test case) and a decision under section 8, Social Security (Transfer of Functions) Act 1999, charging NICs of £987.07. 

E.ON appealed the determination and decision to the First-tier Tribunal (FTT).

FTT decision

The appeal was dismissed.

The FTT found that on a realistic view of the facts, the Facilitation Payments were part of an integrated proposal governing the future employment relationship between E.ON and its employees which included pay increases.

The FTT agreed with HMRC that the Facilitation Payments were "an inducement to … provide future services" on different terms because they were given in exchange for the relevant employee's agreement to changes to their future conditions of employment. They were therefore "from" the employment, within the normal meaning of that term. 

In concluding that the Facilitation Payments were "from" the employment, the FTT noted that it is clear from the Court of Appeal's decision in Kuehne + Nagel Drinks Logistics Ltd and ors v HMRC [2009] UKFTT 379 (TC), that a payment is "from" the employment if employment is a "substantial cause" of the payment.

E.ON appealed to the UT.

UT decision

The appeal was allowed. The UT reversed and remade the FTT's decision. 

The UT concluded that the Facilitation Payments were not “from” employment within the meaning of section 9(2), ITEPA  and section 3(1)(a), SSCBA, but from compensation for the adverse changes being made to the pension scheme.

The UT found that the FTT had erred in law when analysing the ratio in Tilley v Wales [1943] AC 386 and therefore wrongly discounted pension changes compensation as a potential source for the payment. The UT also concluded that the FTT had made an analytical error by applying the same fiscal character as other elements of the proposal to the Facilitation Payments.

Comment 

Companies who have made, or are going to make, payments whilst making changes to their pension schemes will wish to consider this decision carefully as it contains a helpful analysis of the relevant authorities and when payments are considered to be "from" or "derived from" an employment.

The decision can be viewed here.