It is pretty unusual these days for a receipt of any kind not to be chargeable to tax one way or another and it is gratifying to read the case of Collins v HMRC TC 2088 where the Tribunal considered the implications of a receipt of $ 2 million.
Mr Collins was the director of a UK subsidiary of a US company but left the company's employment in 1994. Subsequently the controlling shareholder sold her shares for a profit of $ 600 million. Some time later, in 1998, she made a gratuitous payment to Mr Collins of $ 2 million which he regarded as a personal gift which was not taxable.
HMRC thought otherwise and suggested that this was an emolument from his previous employment with the company. They said that when he left the company's employment he received no compensation (not a surprise as he was not entitled to any) and furthermore they said that he missed out on a bonus payment which had been paid to numerous employees on the occasion of the sale of the company. They also suggested that even if the payment was gratuitous it still derived from the employment.
However, the Tribunal decided that it was not an emolument from his employment. It was merely that the shareholder had chosen to make generous gratuitous payment to Mr Collins who had supported her after her divorce and had contributed to the company's success. More specifically, the Tribunal drew attention to the following pointers which led them to the conclusion that the payment did not constitute an emolument from the past employment:
- The receipt was not only gratuitous, it was totally unexpected. It was paid without the slightest expectation that Mr Collins would do anything that would benefit her. It came as a bolt from the blue to Mr Collins and was a gift in every sense of the word.
- The receipt was wholly disproportionate to the amount of Mr Collins' past salary. It was not to supplement an inadequate salary or designed for that purpose.
- There was not the slightest expectation of receiving the one large payment nor any expectation of any further payment. Regularity and expectation diminish the reality of the gratuitous nature of payments and any such features were wholly absent in this case.
- The payment was not made by the employer and could not have been paid by the employer. Indeed there was nothing that could possibly have induced the employer to pay, or to have paid, more emoluments.
- The payment was not made to an employee, or remotely in connection with the termination of the employment. It was paid approximately 4 years after his resignation. The delay was not cosmetic. It was a recognition by a generous person that for a host of reasons she wished to recognise his contribution to the profit that she had made. The notion that it was to top up his salary 4 years later had no reality.
- The fact that it was made by a person distinct from the employer is a further factor which distances the receipt from emoluments from an employment. The real reason for the payment had nothing to do with paying some late salary on a gratuitous basis.
The timing of the payments in this case were clearly very helpful in demonstrating the lack of connection between the employment and the payment and it would perhaps be unusual for such a long period to occur in another case. However, there is a good deal in this judgment which is helpful to a taxpayer faced with such a payment to support the proposition that it is not (despite the long arm of HMRC) subject to tax.