Payments made to employees on the transfer of a business may be taxable where they are deemed to be related to employment following the decision by the Upper Tribunal in Kuehne & Nagle Drinks Logistics Ltd, Stott and Joyce v HMRC [2010] UKUT 457 (TCC).

In brief, Scottish & Newcastle UK Limited ("SN") sold its drinks distribution business to Kuehne & Nagel Drinks Logistics Limited ("Kuehne") in 2006. As part of that sale, 2000 employees who had previously worked for SN transferred to Kuehne under the TUPE Regulations.

Some of the transferred employees expressed concern that the benefits offered under the pension scheme operated by Kuehne were not as generous as those under the SN scheme. There was a wider concern within SN and Kuenhe that employees might resort to industrial action. In order to compensate employees for the loss of pension rights and as a means of avoiding any such industrial action, Kuehne agreed to pay each of the 2,000 transferring employees the sum of £5,000. The total cost of these payments was met by SN.

In December 2010, the Upper Tribunal held that these payments were taxable as employment income. Even though the compensation payment would not usually give rise to a tax charge in itself, the fact that it was linked to and paid at the same time as an "incentive" payment (an example of "employment income") was sufficient to ensure that the full payment was taxable as employment income. On the basis of the decision of the Upper Tribunal, it is arguable that the compensation payment would not have been liable to a tax charge had it been kept separate from the incentive payment.

Comment: In order to limit the amount of tax payable by employees, it may be prudent to consider splitting any payments made to employees where there are separate, identifiable reasons for that payment being made.