Kuehne & Ors v Revenue and Customs

For employment-income tax and corresponding National Insurance contributions, from employment requires a relevant connection or link between the payment and the employment. Employment need not be the sole cause. A payment is chargeable where the employment-related reason is sufficiently substantial to characterise it as from employment, even though it also serves a substantial non-employment purpose. The fact-finding tribunal must assess the reasons and background and apply that statutory characterisation. An appellate court confined to errors of law must not reweigh the facts or require a further ranking of inseparable causes where a sufficient employment connection has been found.

HMRC decided that payments of £4,800 made to employees on the transfer of their employment to Kuehne + Nagel Drinks Logistics Limited were liable to income tax under the Income Tax (Earnings and Pensions) Act 2003 and to National Insurance contributions under the Social Security Contributions and Benefits Act 1992. The transfer was subject to the Transfer of Undertakings (Protection of Employment) Regulations 2006.

The First-tier Tribunal dismissed the employees’ appeals on 17 December 2009. The Upper Tribunal, on 21 December 2010, upheld that decision. The payments compensated employees for pension changes and were also made to avoid threatened industrial action and secure a smooth transfer. The central issue was whether the tribunals had erred in law in treating the payments as earnings from, or derived from, employment.

1. Appeal dismissed. The First-tier Tribunal had not erred in law in finding that the payments were emoluments from employment, and the Upper Tribunal was right to dismiss the appeal from that decision.
2. Per Mummery LJ, the statutory question was whether the payments were earnings from employment under the Income Tax (Earnings and Pensions) Act 2003, and earnings derived from employment under the Social Security Contributions and Benefits Act 1992. In this fiscal context, “from” requires a relevant connection or link in fact between the payment and the employment. The statutory question, rather than a question reformulated by the parties, had to be answered.
3. An appeal from the First-tier Tribunal is confined to questions of law. The Upper Tribunal and this court could not re-decide or second-guess primary facts or proper factual inferences. Intervention was justified only for misinterpretation or misapplication of the law, perverse findings unsupported by evidence, or a plainly wrong conclusion.
4. The judicial explanations of “from employment” assist but cannot displace the statutory words, as illustrated by Hochstrasser v Mayes [1959] 38 TC 673. The appellants’ reformulated question selectively stated the facts and imported non-statutory concepts. Failure to answer that question was not an error of law.
5. Employment need not be the sole cause of a payment. Per Patten LJ, it must be sufficiently substantial to characterise the payment as from employment rather than from something else. The broader suggestion that any more-than-marginal employment-related cause automatically suffices was not accepted, but the payment here was made because the consequences of threatened industrial action had to be avoided. The First-tier Tribunal had found that threat to be a substantial cause and had characterised the payment as a reward or incentive for future willing service. The pension-compensation purpose did not cancel or diminish that connection. Even if the two causes were equal and substantial, the statutory test would be satisfied.
6. Etherton LJ agreed that employment was a sufficiently substantial reason to characterise the payments as payments from employment. The appeals were therefore dismissed.

• Court of Appeal (Civil Division) — On 26 January 2012, dismissed the appeal from the Upper Tribunal: [2012] EWCA Civ 34.
• Upper Tribunal (Tax and Chancery Chamber) — Newey J upheld the First-tier Tribunal’s decision on 21 December 2010.
• First-tier Tribunal — Judge Hellier dismissed the appeals on 17 December 2009.
• HMRC — On 5 November 2008, decided that the payments were liable to income tax and National Insurance contributions.