RCI Europe v HM Inspector of Taxes

Payments made for restrictive covenants may be chargeable under section 313 of the Income and Corporation Taxes Act 1988 where the undertaking has a real connection with the recipient’s present, past or future employment. That connection may include the termination of employment.

For section 4(4) of the Social Security Contributions and Benefits Act 1992, “employed earner” refers to the employment status to which the payment is attributed, not necessarily to the recipient’s status when payment is made. Payments made before employment begins or after it ends may therefore be treated as earnings from that employment. The period to which such payments are attributed remains a question of fact.

RCI Europe appealed under section 56A of the Taxes Management Act 1970 against a decision of Special Commissioner Dr Avery Jones. The Commissioner had dismissed RCI’s appeal against a Revenue decision that RCI was liable for primary and secondary Class 1 national insurance contributions on £2.2 million paid to Julian Haylock, a former director and employee.

The payments were made under a severance agreement in return for restrictive covenants applying after termination. The issues were whether the payments were chargeable under section 313 of the Income and Corporation Taxes Act 1988, whether section 4(4) of the Social Security Contributions and Benefits Act 1992 applied to payments made after employment ended, and which earnings period applied under the Social Security (Contributions) Regulations 1979.

1. Appeal dismissed. The payments were subject to primary and secondary Class 1 national insurance contributions.
2. Section 313 of the Income and Corporation Taxes Act 1988 requires a real, rather than illusory or de minimis, connection between the giving of the restrictive undertaking and the present, past or future holding of office or employment. The required connection may be with termination of the employment. The severance agreement, the relationship of the covenants to RCI’s business, and Mr Haylock’s knowledge obtained during employment established that connection.
3. The statutory definition of “employed earner” in section 2(1) of the Social Security Contributions and Benefits Act 1992 contains no temporal limitation. The word “is” does not require the recipient to be employed by the relevant employer when payment is received. Section 4(4) refers to the status to which the payment is attributed. RCI was therefore the secondary contributor in relation to the payments.
4. The statutory scheme supported that construction. Section 313 brings payments made before, during or after employment into charge for income tax, and section 4(4) treats all such payments as earnings. Sections 27(1)(a), 103(1) and 103(2) also demonstrate that “employed earner” may include a person whose employment has ended.
5. The Commissioner was not bound to apply regulation 6A(5) of the Social Security (Contributions) Regulations 1979. Whether a payment is attributable to a particular earnings period is a question of fact determined by all the circumstances, including its source and the payer’s intention. The Commissioner was entitled to apply regulation 3 or regulation 4.

• High Court (Chancery Division): Lightman J dismissed RCI’s appeal on questions of law under section 56A of the Taxes Management Act 1970.
• Special Commissioner: Dr Avery Jones dismissed RCI’s appeal against the Revenue’s decision that the payments attracted primary and secondary Class 1 national insurance contributions.