A recent tax case concerning compensation for a beer allowance and pension rights following a TUPE transfer highlights the need for new employers to carefully consider the origins of every payment made to employees.
The facts of this case
In 2006 Scottish and Newcastle (S&N) entered into a joint venture with Kuehne and Nagel Drinks Logistics Limited (Kuehne). As part of the joint venture approximately 2000 S&N employees were due to transfer to Kuehne under TUPE. The transferring employees raised concerns before the transfer took place: the pension provided by Kuehne was not as good as the pension provided by S&N; and transferring employees would also lose their S&N beer allowance.
In order to ensure that there was a smooth transfer (unaffected by possible strike action over the employees concerns) S&N agreed to compensate each employee: £200 would be paid in respect of the lost beer allowance, and a further £4,800 would be paid in respect of the lost pension rights. The cost of the payments was to be borne by S&N but for convenience they were routed through Kuehne.
HMRC argued that the entire payment should be subject to tax and National Insurance contributions. As payer and acquiring employer, it was Kuehne which HMRC considered liable for the PAYE and NICs which HMRC considered should have been deducted at source.
The tax tribunal decisions
The case was determined by the tax tribunals. The relevant legislation (section 9 ITEPA 2003, and section 4 SSCBA 1992) provided that if a payment to an employee came “from an employment” then it would be caught by the taxing provisions, and if a payment was “derived from an employment” then it would be subject to NICs. At the first instance hearing it was common ground that the £200 for the lost beer allowance was taxable and subject to NICs because it was compensation for the transferring employees losing a right which came from their employment with S&N.
Kuehne and two representative employees argued that the remaining £4,800 should not be subject to tax or NICs because it compensated the transferring employees for the differences in the pension schemes provided by S&N and by Kuehne. In an earlier decision of the House of Lords compensation for loss of pension rights had not been considered to be from employment. The First-tier Tribunal decided that in this case the payments were made to ensure a smooth TUPE transfer as well as in recognition that upon the TUPE transfer the transferring employees would lose their rights to the pension with S&N. Crucially, the two reasons for the payments could not be separated. Therefore the First-tier Tribunal held that the full £5,000 was “from an employment” and therefore subject to tax, and also “derived from an employment” and therefore subject to NICs.
The Upper Tribunal upheld this decision, concluding that although the test was whether the payment was “from” the employment, it was acceptable to look at the reasons for making the payment in order to answer that question. The judge also considered that it was possible for there to be more than one reason for making the payment. If, as in this case, the reasons for the payment (here the attempts to avoid industrial action and the recognition of the loss of pension and beer allowance) could not be separated, then if one of those reasons would cause the payment to be taxable, then the payment would be taxable. Kuehne and the employees were therefore liable to pay tax and NICs on the payments.
If payments are routed through them, transferee employers may become liable to HMRC for tax and NICs on payments made to transferring employees even if the payments are compensation for loss of rights not previously considered to be from the employment. This case will be of interest to any employer acquiring employees under a TUPE transfer where it is proposed that those employees should be given compensation.
When undertaking due diligence, the origin of the payment should be carefully analysed to ensure that payments are correctly characterised and, if it is a payment “from” employment, that tax and NICs are deducted at source. Particular care may be needed where employees are transferred out of the public sector or other sectors with strong union representation where there is greater potential for employers to consider compensation payments efficacious to avoid industrial action.
Employers should also consider seeking indemnities covering any tax and NICs which may be due to HMRC in such cases. Such indemnities should cover not only the tax and NICs but any possible interest, penalties and costs of subsequent litigation with HMRC.