EMI Group Electronics Ltd v Coldicott

A payment in lieu of notice made under a contractual termination provision agreed when employment began is an emolument from the employment. It is paid in return for being an employee and is taxable under Case I of Schedule E.

The correct enquiry is the true character of the payment. A contractual payment which lawfully enables the employer to end employment is not compensation or damages for breach. It represents the employee’s contractual security of salary during the notice period. It therefore takes the character of the taxable salary which would otherwise have been paid.

This differs from a payment made for the surrender or release of existing contractual rights, and from a redundancy payment directed to relieving the hardship of unemployment.

The employer terminated two senior managers’ employment for redundancy before expiry of their contractual six-month notice periods. Under their contracts, the employer could terminate on making a payment equivalent to salary in lieu of notice. Each employee received a redundancy payment and a separate payment in lieu of notice.

The Revenue determined that the employer should have deducted tax from the payments in lieu. The Special Commissioners dismissed the employer’s appeals, reported at [1996] STC (SCD) 455. Neuberger J dismissed a further appeal, reported at [1997] STC 1372.

The central issue was whether contractual payments in lieu of notice were emoluments from employment chargeable under Case I of Schedule E, rather than payments falling only within the statutory regime for termination payments.

1. Appeal dismissed. Chadwick LJ, with whom Ratte J and Simon Brown LJ agreed, held that each payment in lieu of notice was an emolument from employment and was taxable under Case I of Schedule E.

2. The necessary first enquiry was to identify what the payment was truly made for. The governing formulations were whether it was paid in return for acting as or being an employee, or for some other reason. The fact that a payment was made when employment ended did not determine its character.

3. These contracts gave the employer an additional, lawful means of termination: it could terminate before the full notice period by paying the employee the equivalent salary for the balance of that period. The payment was made under the contract of employment, not as agreed or liquidated damages for breach. It was not payment for work done, but it was part of the consideration for the employee entering and serving under the contractual employment arrangement.

4. The payment represented the contractual security of continued salary which the employee had required when entering employment. It was therefore paid in return for being an employee. It was analogous to the contractual termination payment held taxable in Dale v de Soissons, rather than to payments made for a later surrender or release of accrued contractual rights.

5. The principle that a substitute payment normally takes the character of the payment it replaces did not assist the employer. These payments replaced taxable salary during the notice period, not damages for wrongful dismissal. Nor was there a close analogy with non-statutory redundancy payments, whose purpose could include relieving hardship caused by unemployment and which were payable in addition to notice pay.

6. The Special Commissioners and Neuberger J were correct. The appeal was dismissed with costs, and leave to appeal to the House of Lords was refused.

• Court of Appeal: Appeal dismissed. The court affirmed that the contractual payments in lieu of notice were taxable emoluments.
• High Court: Neuberger J dismissed the employer’s appeal from the Special Commissioners and affirmed their decision in principle: [1997] STC 1372.
• Special Commissioners: The employer’s appeals from PAYE determinations were dismissed: [1996] STC (SCD) 455.