A mix of the predictable and some consultation to watch this space for … income tax rates and allowances; share option scheme changes; international points; benefits and a few more – read on for more information.
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HMRC have increased the amount that can be paid to an employee for homeworking expenses to £4 per week, from 6th April 2012.
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Seafarer’s earnings deduction – what is it?
In brief, the SED is a deduction in calculating income tax given to “seafarers” – those who are employed on ships (including tankers etc), and work mainly outside the UK (must carry out duties on at least one voyage that begins or ends at a foreign port). it recognises that these individuals spend enough time outside the UK that it’s not entirely reasonable to tax them in the same way as someone who is able to make more use of the services etc paid for by taxes (in theory). There’s no requirement that the seafarer be any sort of technical sailor – musicians on courier ships count. Crown employees (Royal Navy etc) can’t claim.
Given this, HMRC tend to be reluctant to give the deduction if they can figure out a way to deny the claim. Arguments have usually focused on “you’re not an employee” (Pete Matthews (1) Keith Sidwick (2) v Revenue & Customs [2011] UKFTT 24 (TC) – one of the very rare occasions that HMRC argue against status as an employee!) or whether or not the thing they work on is a “ship”. There is no definition of a ship in tax law but ‘offshore installations’ are specifically not regarded as ships.
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After years of rumour and dispute and enquiries on all sides, the Telegraph is now reporting that HMRC have concluded a number of image rights settlements in relation to footballers and football clubs (but not Rangers – apparently the tax bill that tipped them into administration related to employee benefit trusts rather than image rights).
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The Court of Appeal has confirmed the decisions of the First Tier Tax Tribunal and Upper Tier Tribunal in Kuehne & Ors v Revenue and Customs [2012] EWCA Civ 34 that payments made to employees as part of the transfer of a business were taxable as employment income.
The issue began with concerns amongst the transferring employees that the pension arrangements under their new employer would be less generous than their pre-transfer arrangements; industrial action was threatened. Following negotiation, the employees accepted payments of £4,800 each. The question was, what was this payment for and was it taxable as income from the employment?
The payments were held to be both compensation for loss of pension rights and an incentive not to strike. These causes were inextricably linked and, even though the compensation for loss of pension rights might – on its own – be capable of not being employment income, the fact that this element could not be separated from the payment not to strike meant that the whole amount was taxable as employment income.
It might – with some forethought – have been possible to structure the payment in two elements, so that tax was only payable on one part of it. It’s questionable whether this would have worked in this particular case – the judgments at all levels seem clear that the payment was for the combined effect and that the compensation of loss of pension rights could not be separated from the payment not to strike. They were, arguably, cause and effect – the loss of the pension rights leading to the threat of strikes, leading to the payment – so an attempt to separate payments may not have worked to exempt part of the payment here.
Nevertheless, it’s always a good idea to separate out elements of compensation (where appropriate) to avoid arguments with HMRC later.
Other points arising:
From employment, or from termination of employment?
The judge at the First Tier Tribunal held that “… the payments were made… as compensation for that change in pension scheme [and] were made because, had they not been made, it was likely that industrial action would have followed”. In particular, the payment was not in made because of the termination of employment in the TUPE process, and so could not be within the termination payment exemption. Instead, the termination “was the trigger for the payment but [the payments] were made because of the loss of pension rights and expectations and to ensure willing work without industrial action”.
The Court of Appeal confirmed this, noting that “the use of ‘from’ in the idea expressed in the statutory expression ‘earnings from an employment’ and ‘earnings derived from an employment’ in a fiscal context indicates, as matter of plain English usage, that there must, in actual fact, be a relevant connection or a link between the payments to the employees and their employment.”
More than one ‘from’?
The Upper Tier Tribunal judge noted further that “a payment is to be regarded as ‘from’ an employment even though it might also be said to be ‘from’ something else … the legislation does not exclude the possibility of a payment being ‘from’ something else as well as employment … [where] a Judge decides that it is impossible to separate or rank causes, there can be no basis for deciding that a payment is to be attributed to a non-taxable one as opposed to a taxable one.”
I’m amused that there was no dispute about the taxability of the £200 paid to each employee for the loss of a beer allowance.
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