Venables and others v. Hornby (Her Majesty's Inspector of Taxes)

The House of Lords considered whether lump sum payments made to a member of an approved occupational pension scheme were "expressly authorised by the rules of the scheme" within the meaning of section 600(2) of the Income and Corporation Taxes Act 1988 and, in consequence, whether they were chargeable to income tax under Schedule E.

Key legal principles decided were: (i) the phrase "employee" in the trust deed (and the incorporated statutory definitions in section 26(1) of the Finance Act 1970) is a drafting device and does not necessarily require a member who is both employee and director to retire from both roles before being treated as having "retired" for pension purposes; (ii) where a member gives up the pensionable occupation in which he received remuneration (here, executive employment) but continues only as an unpaid non-executive director, he can nonetheless be regarded as having retired for the purposes of the trust deed and rules so that benefits payable under the rules are authorised; (iii) whether an unauthorised payment in breach of trust should be treated as not having been made (for tax purposes) depends on further questions about payment or receipt and equitable obligations; the House did not finally determine that secondary question in this appeal.

Background and parties: The appellants were beneficiaries/members of the Fussell Pension Scheme and trustees. The respondent was the Inspector of Taxes who assessed the principal appellant to income tax in respect of three lump sum payments made from the pension scheme in July and August 1994 totalling £580,591.

Procedural history: The special commissioner dismissed the taxpayer's appeal. On judicial review/appeal Lawrence Collins J (High Court) reversed and discharged the assessment. The Court of Appeal allowed the revenue's appeal. The matter came before the House of Lords on the appellants' appeal.

Nature of the application: Challenge to income tax assessments made under section 600(2) of the Income and Corporation Taxes Act 1988 on the basis that the payments were not "expressly authorised by the rules of the scheme". Secondary issue: if payments were unauthorised and in breach of trust, whether they nevertheless counted as payments "out of" the funds of an approved scheme for tax purposes.

Facts (concise):

• The pension scheme was an approved occupational final salary scheme. The trust deed defined "employee" as including a director and included the statutory definition of "relevant benefits" from section 26(1) of the Finance Act 1970.
• The taxpayer had been an executive director and chairman for many years, did substantial paid executive work until 30 June 1994 and from that date was recorded as "retiring as an executive director" but continuing as an unpaid non-executive director. He remained a significant shareholder and was a trustee of the pension scheme.
• The revenue contended that because the taxpayer continued as a director he had not "retired" within the meaning of the rules and the payments were therefore unauthorised.

Issues framed by the court:

• Whether the taxpayer had "retired" within the meaning of the trust deed and rules when he ceased his remunerated employment but remained an unpaid non-executive director;
• Whether the payments were thus "expressly authorised by the rules of the scheme" for the purposes of section 600(2) of the Income and Corporation Taxes Act 1988;
• Whether, if the payments were unauthorised and in breach of trust, they should be treated for tax purposes as if not made (i.e. as not made "out of" scheme funds) because a trustee receiving them held them subject to equitable restitution.

Court's reasoning and disposition: The majority construed the trust deed and the incorporated statutory definitions, holding that the definition "employee includes a director" was a drafting device and did not mean a person who was both an employee and a director had to retire from both roles before qualifying as having retired for pension purposes. The trust deed and its recitals showed the scheme was intended to provide benefits to persons in the company's service whether as employees or directors; retirement therefore meant ceasing the pensionable occupation. The appellant had ceased his pensionable paid employment and therefore had retired for the purpose of entitlement to the lump sum; the payments were authorised by the rules and the assessments were discharged. The House expressly left open a final determination on the more technical second issue (whether unauthorised payments in breach of trust can be treated as not having been made for tax purposes), although it noted the point and the possible two approaches (focusing on payment or on receipt). The House allowed the appeal and discharged the assessments.

Appeal allowed. The House held that a person who ceases the pensionable employment in which he received remuneration may be regarded as having "retired" for the purposes of the trust deed and scheme rules even if he continues in an unpaid non-executive directorship; accordingly the payments were authorised by the rules and not chargeable under section 600(2). The House did not finally determine whether, if payments had been unauthorised and made in breach of trust, they should nevertheless be treated as not having been made for tax purposes.

Special Commissioner: appeal dismissed. High Court (Lawrence Collins J): appeal allowed and assessments discharged ([2002] ICR 81). Court of Appeal: allowed the revenue's appeal ([2002] EWCA Civ 1277; reported [2003] ICR 186). House of Lords: appeal allowed ([2003] UKHL 65).