E.ON UK Plc v The Commissioners for HMRC

A payment made to compensate employees for adverse changes to pension rights or expectations is not necessarily from employment. The tribunal must identify, by evaluating all relevant facts, the actual reasons for the payment and then characterise its source. Employment is sufficiently connected only if it is a substantial cause.

The principle in Tilley v Wales extends beyond accrued pension rights to existing rights and expectations concerning future pension accrual. A payment made for their diminution is from that pension source rather than employment, unless there is a substantial employment cause. A payment’s inclusion in an integrated employment package does not itself give it the fiscal character of the package’s other elements.

E.ON UK Plc paid a one-off Facilitation Payment to members of its defined-benefit pension schemes while implementing changes which reduced the value of future pension provision. Mr Brotherhood, a Retirement Balance member, received £3,791. HMRC assessed PAYE and national insurance on the basis that the payment was from his employment.

The First-tier Tribunal dismissed E.ON’s appeal, holding that the payment was an inducement to provide future services on different terms and was inseparable from an integrated package of employment measures: E.ON UK PLC v HM Revenue and Customs [2021] UKFTT 156 (TC). E.ON appealed on the proper scope of the replacement principle, Tilley v Wales, and the statutory question whether the payment was from employment.

1. Appeal allowed. The First-tier Tribunal’s decision was set aside and remade. The Facilitation Payment was not from Mr Brotherhood’s employment. The PAYE determination and NICs decision were therefore determined at nil.

2. The replacement principle from Mairs v Haughey is a useful guide, not an overarching rule. In this case it did not compel the conclusion that the payment replaced either exempt employer pension contributions or earnings. The changes could be analysed in more than one way and the principle yielded no decisive answer.

3. Tilley v Wales was wrongly confined by the First-tier Tribunal to accrued pension rights. Its principle covers a sum paid for the release or diminution of existing obligations concerning pension provision, including contingent rights and expectations about future accrual. If the payment is compensation for that non-employment source, and employment is not a substantial cause, it is not taxable as employment earnings.

4. The statutory inquiry requires the fact-finding tribunal to evaluate the reasons for the payment and then characterise it. A substantial employment cause is sufficient, but the tribunal must consider all serious alternative sources. It cannot treat a payment as employment income merely because it formed part of a wider integrated package containing pay and employment measures.

5. Here, the payment was confined to members adversely affected by the defined-benefit pension changes. The contemporaneous material described it as a facilitation measure associated with those changes. The pension arrangements had become less valuable, even though accrued rights remained intact and a member could pay more to preserve a benefit level. There was no independent factual basis for treating the payment as an inducement for future services. Its source was compensation for adverse changes to pension rights and expectations.

• Upper Tribunal (Tax and Chancery Chamber): allowed E.ON’s appeal, set aside the First-tier Tribunal’s decision, remade the decision, and determined the PAYE and NICs amounts at nil.
• First-tier Tribunal (Tax Chamber): dismissed E.ON’s appeal against the assessments: E.ON UK PLC v HM Revenue and Customs [2021] UKFTT 156 (TC).