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The Court of Appeal’s ruling in E.ON

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Occasionally, a court judgment is expressed with such clarity that one can do no better than to repeat it:

‘An employer offers its employees a number of benefits. It decides that one of them is too expensive, and wishes to reduce the cost of providing it. Rather than seeking to force this change on its employees, it invites them each to agree to the change. In return for such agreement it offers them a package of incentives, including guaranteed pay rises and a one-off cash payment. The question is whether the cash payment is subject to income tax and NICs. That depends on whether it is “from employment”.’

In the absence of authority, I would have thought the answer to that question was straightforward. The employees are being asked to agree to a change in the terms on which they might be employed in the future, and in return receiving a payment in money. The payment seems to me plainly to have come from their employment.

Thus proclaimed Lord Justice Nugee in the recent case of HMRC v E.ON UK plc [2023] EWCA Civ 1383 (reported in Tax Journal, 15 December 2023). Further, he concluded that there was not ‘anything in the authorities which requires a different answer’. So HMRC’s appeal would be allowed.

In E.ON, the Upper Tribunal had thought it of crucial importance that the change in question related to pension provision. The Court of Appeal disagreed: what was important was that the payment related to an adverse change in the employment terms going forward (accrued pension benefits were unaffected). The precise nature of the change was unimportant.

The decision is thus consistent with earlier cases in which tax has been chargeable on, for example, payments made to employees for giving up their right to a company car (Bird v Martland [1982] STC 603) and to refuse collectors for giving up their right to rummage through the bins and flog anything of value they found there (Holland v Geoghegan (1972) 48 TC 482 – the world was such a different place in 1969!).

Issue: 1649
Categories: In brief