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This is an interesting case.
Interesting in the sense that it surprises me that it ever came to the tribunal. The outcome, that bonuses paid to the former employee / LLP members should be treated as earnings, seems abundantly clear from the facts.
However, that said, the judgement serves a useful illustration of some of the case law in this area.
The Jermyn facts
The LLP set up bonus schemes for senior employees in 2008. Each of those senior employees was a member of either Scheme A or Scheme B.
In 2010, the employees received letters that set out the terms of their membership of the schemes. The following points are worthy of note:
In 2012, it was proposed that some of those employees were to be promoted to become members of the LLP. It was feared, that technically, this might affect their status under the scheme. As such, the LLP wrote to the relevant persons stating that the change in status from being an employee to becoming a member would not affect eligibility under the bonus scheme.
The individuals in Scheme A received their bonus payments in 2013/14. In this year, they were no longer employees having become members of the LLP already.
Those in Scheme B received their payments in the same year. However, they had been employees at the start of the year and only became members of the LLP part way through the tax year.
Interestingly, the LLP had originally accounted for the payments as earned income. However, presumably following advice, they decided that the payments should have been self-employed income and applied for a refund of the ‘excess’ NICs.
We are told that around £1m was at stake.
What was the (Saville) Row about?
As was the case at the earlier FTT hearing, the issue to be determined was:
Earnings from employment
The case is interesting as it provides a handy tour of the case law in this area.
First to face the UTT’s tape measure is Mitchell and Edon v Ross . This is an old case concerning NHS consultants who had both NHS (employed) and private (Self-employed) income. It seems fairly obvious today that one would treat each income source separately for tax purposes. However, the House of Lords set out the principle that each source of profit should be assessed under the appropriate schedule. Of course, the schedular system has now disappeared. However, te correct starting point is that one must determine whether the payment is assessabek as ‘employment income’ under ITEPA 2003 or constitutes the profits of a trade under ITTOIA 2005.
Former England goalie Peter Shilton (Shilton v Wilmhurst ) also makes an appearance. Shilts’ was signed from Nottingham Forest by Southampton. Unusually perhaps, he received payments from both clubs for agreeing to the transfer. It was held that both payments were taxable under as earnings from his new employment. However, the distinction was drawn between an emolument derived “from being or becoming an employee” and an emolument which is attributable to something else. Where a payment is not for past services or an inducement to become an employee (as in Shilton) then the payment is not received “from employment”.
In Hochstrasser v Mayes  it was confirmed that the payment must be made in relation to services provided by the employee by virtue of his or her office and it must be a reward paid for services past, present or future. As per Lord Radcliffe:
“it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee”
The more recent case of Kuehne + Nagel Drinks Logistics Ltd v HMRC  highlighted that there must be a causal link between the payments and their employment
Again, in this context, more recent caseof RCI Europe v Woods  it was held that a payment made to an ex-employee to extend his restrictive covenants was taxable as earnings from that employment.
The Supreme Court decision in HMRC v Forde & McHugh Limited was also cited. Here, funds were transferred on to trust for the benefit of an employee (and his family). However, his only interest in these funds was contingent on him getting to retirement age. This is similar to Edwards and Roberts in that it was held that the payments were ‘from employment’ but only taxable once the contingency fell away.
Indeed, as an aside, in Forde & McHugh, the judgement was delivered by Lord Hodge – the same chap who handed down the decision in Murray Holdings (aka Rangers case). Such contingencies seemingly survive the re-direction of earnings principle in that Rangers judgement.
The UTT’s decision was that the individuals received the bonus payments in their capacity as former employees of the LLP. They were received in respect of contractual rights that they had acquired under the scheme before they became members of the LLP. As such, they were derived from employment.
As far as I am concerned, the UTT has clearly come to the correct decision here in that the rights under the bonus payments arose from their capacity as employees.
The fact that they were paid after the employment ended (or they had become members of the LLP) is irrelevant.
It seems odd that this case came to the UTT. However, it does provide for an opportunity for a quick memory jog!
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