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

A member of an occupational pension scheme may retire from a pensionable occupation while continuing in a distinct, non-pensionable office. A definition providing that an employee “includes a director” does not invariably require a person who held both positions to relinquish both before retiring.

The scheme must be construed in its context and according to its purpose. A paid executive who gives up all remunerated executive responsibilities may therefore retire despite remaining an unpaid non-executive director. Payments of retirement benefits authorised on that construction do not attract the charge imposed by section 600(2) of the Income and Corporation Taxes Act 1988.

The taxpayer received three payments totalling £580,591 from an approved occupational pension scheme after ceasing his paid executive responsibilities but remaining an unpaid non-executive director. The Revenue assessed the payments under section 600(2) of the Income and Corporation Taxes Act 1988, contending that he had not retired and that the payments were therefore unauthorised.

The special commissioner dismissed the taxpayer's appeal because he considered that the taxpayer had not retired in normal health. Lawrence Collins J, reported at [2002] ICR 81, held that the taxpayer had retired, reversed the finding about his health and discharged the assessment. The Court of Appeal, in [2002] EWCA Civ 1277, reported at [2003] ICR 186, allowed the Revenue's appeal because the taxpayer had remained a director.

The principal issue before the House was whether continuing as an unpaid non-executive director prevented retirement within the pension scheme. A secondary issue, arising only if the payments were unauthorised, concerned whether payments made in breach of trust to a trustee were nevertheless made out of the scheme funds.

1. Appeal allowed by a majority of four to one; assessments discharged. Lord Millett delivered the leading speech. Lord Nicholls and Lord Slynn agreed with his reasons. Lord Scott agreed that the appeal should be allowed, although he differed on whether the taxpayer had been employed under a contract of service. Lord Walker dissented.

2. Per Lord Millett, the definition of “employee” as including a director did not mean that a person who was both an employee and a director had to relinquish both capacities before retiring. A definition clause is principally a drafting device and may create ambiguity when used as shorthand. The trust deed's recitals showed that the scheme served persons engaged by the company whether as employees or as directors. The underlying concept was pensionable occupation.

3. Per Lord Millett, the taxpayer retired from his pensionable occupation as a paid employee when he ceased all such service. His continued unpaid non-executive directorship was non-pensionable and did not affect his entitlement. Even continued receipt of directors' fees would not have prevented retirement from the separate pensionable occupation as an employee, although those fees would not enter the calculation of that benefit.

4. Per Lord Scott, the taxpayer had not been shown to have a contract of service. Nevertheless, a person who relinquished all executive responsibilities and retained only an unpaid non-executive office had retired according to the ordinary meaning of that word and for the purposes of the deed. The inclusive definition of employee did not justify a narrower meaning.

5. Per Lord Millett, the special commissioner had sufficient evidence to find that the taxpayer had been a paid employee. Neither the absence of a written contract nor influence over a family company was conclusive. Control was relevant and could be decisive, but even a controlling shareholder could have a genuine employment contract.

6. Per Lord Millett, obiter, the early-retirement provision covered retirement in ill health. The words “in normal health” were expository rather than limiting. That reading gave effect to the evident purpose of the scheme and avoided an unintended omission.

7. The payments were consequently authorised, so the charge under section 600(2) of the Income and Corporation Taxes Act 1988 did not arise. The House did not decide whether an unauthorised payment to a scheme trustee, carrying an equitable obligation to restore it, would still have been made “out of” the scheme funds.

8. Lord Walker would have dismissed the appeal. He considered that no employment contract could properly be inferred and that the taxpayer's directorship was his sole qualification for membership. On the statutory and fiscal construction of the scheme, his transition from executive to non-executive director did not amount to retirement.

1. House of Lords: By [2003] UKHL 65, allowed the taxpayer's appeal by a majority of four to one and discharged the assessments.
2. Court of Appeal: By [2002] EWCA Civ 1277, reported at [2003] ICR 186, allowed the Revenue's appeal. It held that the taxpayer had not retired while he remained a non-executive director and that the resulting unauthorised payments could not be treated as unmade.
3. High Court: Lawrence Collins J, reported at [2002] ICR 81, upheld the finding that the taxpayer had retired, reversed the finding that he was not in normal health and discharged the assessment.
4. Special commissioner: Dismissed the taxpayer's appeal against the assessment because, although he had retired, he had not retired in normal health as required by the commissioner's construction of the scheme.