Telfer v Sakellarios

Payments made under an agreement resolving an employee’s contractual remuneration rights may remain employment income where the agreement does not dispose of an existing beneficial shareholding but realises contractual rights payable on termination or other agreed events. A payer who is not the employer may nevertheless be an “other payer” for PAYE purposes. The obligation to operate PAYE depends on whether the payer has sufficient continuing connection with the United Kingdom to make collection effective. Where the payer has the recipient’s tax code, deductions should ordinarily be made by reference to that code. A contractual right to recover sums paid under a mistake is not established by an implied term where the proposed term depends on circumstances arising after the contract was made.

The claimant sought payment of approximately £930,000 under a deed requiring the defendant to make instalment payments totalling £2.82 million. The claimant had previously been promised an interest connected with the value and profits of companies in the Pisani group. The defendant contended that the payments discharged contractual remuneration obligations and that PAYE should have been deducted.

The claimant argued that he had disposed of a beneficial interest in shares, so that the payments were capital rather than employment income. The court also considered the defendant’s tax presence, the applicable deduction rate, an alleged indemnity, and the defendant’s counterclaim for reimbursement of tax not deducted.

1. Construction. The deed was construed in its commercial and documentary context. The claimant had contractual rights to payment based on the value and profits of the company, not a beneficial interest in shares. The deed realised those existing rights and granted no new shareholding or trust. The December Agreement, including its provision that the interests related to value and profits rather than shares, was decisive. Rectification was therefore unnecessary.
2. Indemnity. The claim under clause 8 failed. The clause was a conventional limitation provision and could not sensibly be read as imposing an almost unlimited liability for tax, interest and associated costs.
3. PAYE. The payments were employment income under sections 9 and 62 of Income Tax (Earnings and Pensions) Act 2003. The defendant was an “other payer” under the Income Tax (PAYE) Regulations 2003, applying the reasoning in R (on the application of Oriel Support Ltd) v RCC [2009] STC 1399.
4. The defendant had sufficient UK tax presence. The relevant question was whether, by coming into the United Kingdom, he had subjected himself to UK jurisdiction so that PAYE collection could be made effective. His substantial Kent home, UK earnings and other continuing connections satisfied that test. The shareholding and directorships alone would not have carried sufficient weight.
5. Under regulation 21(1) of the 2003 Regulations, the defendant had to deduct by reference to the claimant’s tax code. As the claimant was a higher-rate taxpayer, deduction was required at the higher rate. Booth v Mirror Group [1992] STC (SCD) 615 concerned a different one-off payment and did not require the basic rate here.
6. The counterclaim based on an implied term failed. The alleged term could not be formulated without reference to later circumstances. The defendant nevertheless established in principle a restitutionary claim for reimbursement of past sums paid under a mistake, subject to the facts and the position of HMRC.
7. The claimant’s claim failed. The court deferred final payment and reimbursement orders pending fuller disclosure concerning the parties’ dealings with HMRC and the arrangements for satisfying any tax liability.