SCA Packaging Ltd v HM Customs & Excise

Contractual provisions for payment in lieu of notice should be construed consistently with the employee’s existing entitlement to notice unless the contract clearly provides otherwise. A redundancy memorandum intended to protect and compensate employees did not confer on the employer a right to dismiss without notice or derogate from contractual notice rights.

Where the contract expressly provides for payment in lieu of notice, payment made pursuant to that provision is made under and by virtue of the employment contract. It therefore constitutes an emolument from employment for the purposes of section 19 of the Income and Corporation Taxes Act 1988.

SCA Packaging appealed against a decision of a Special Commissioner concerning payments made to redundant employees in lieu of unexpired notice periods. The employees’ contracts incorporated a memorandum agreed with trade unions, which provided for redundancy payments and payment in lieu of notice.

The Commissioner held that the payments were contractual payments arising from the continuing employment contracts and were therefore emoluments from employment chargeable to income tax and National Insurance contributions. SCA challenged that construction, arguing that the payments arose from a variation or termination of the contracts and were not emoluments from employment. The central issue was the proper construction of the contractual notice and redundancy provisions.

1. Appeal dismissed. The court differed from the Special Commissioner on the construction of the contractual documents but reached the same conclusion on the tax consequences.
2. The employees had contractual and statutory rights to notice. The redundancy memorandum was designed to provide additional protection and compensation. It could not sensibly be construed as derogating from those existing rights or as giving SCA a contractual right to terminate employment without notice merely by making a payment in lieu.
3. Clause 5.7 applied whether payment in lieu was made unilaterally, in breach of contract, or by agreement with the employee. Clause 5.8, concerning existing employees, entitled them to payment of any unexpired notice period at termination. Clause 5.10 proceeded on the same basis for new employees. These provisions treated the notice period as part of the employee’s service and provided for payment as a contractual debt, without any deduction for mitigation.
4. The relevant employees agreed to payment in lieu, and SCA made the sums required by the memorandum. Their contracts were neither varied nor discharged. The payments were made under contractual provisions that had existed from the inception of the contracts or, where later, from 1992, in circumstances expressly contemplated by those contracts.
5. The payments therefore constituted emoluments from employment under section 19 of the Income and Corporation Taxes Act 1988. No wider consideration of the tax treatment of payments arising in other contractual situations was necessary.

1. High Court (Chancery Division): The appeal from the Special Commissioner’s decision was dismissed. The court adopted a different construction of the contractual provisions but upheld the conclusion that the payments were emoluments from employment.