The Commissioners for HMRC v E.ON UK Plc

The decisive question for employment-income taxation is whether a payment is earnings or remuneration from employment. A payment made to secure agreement to adverse changes in future pension arrangements can be earnings from employment, even when described as compensation and even when it is not conditional on continued employment.

The rule concerning commutation of accrued pension rights does not extend to prospective reductions in future pension benefits. The replacement principle is a tool of varying utility, not an overarching rule. The character of a payment depends on the statutory question and, where relevant, on what the payment actually replaces.

E.ON made one-off Facilitation Payments to members of its defined-benefit pension scheme who agreed to changes affecting future pension benefits. The First-tier Tribunal held that the payment made to Mr Brotherhood was subject to income tax and national insurance contributions in [2021] UKFTT 156 (TC).

The Upper Tribunal allowed E.ON’s appeal in [2022] UKUT 196 (TCC), holding that the payment was compensation for adverse changes to pension rights and expectations rather than earnings from employment. HMRC appealed, raising the central question whether the payment was earnings or remuneration derived from employment.

HMRC’s appeal was allowed. The Court of Appeal remade the Upper Tribunal’s decision by dismissing E.ON’s appeal against the First-tier Tribunal’s decision.

1. The statutory question was whether the Facilitation Payment constituted earnings from employment for income tax and remuneration derived from employment for national insurance purposes. This was the single fundamental question under the Income Tax (Earnings and Pensions) Act 2003 and the Social Security Contributions and Benefits Act 1992.
2. The ratio of Hunter v Dewhurst (1932) 16 TC 605 was that payment made to release an existing contingent liability was not remuneration. Tilley v Wales [1943] AC 386 similarly concerned a lump sum paid in commutation of an accrued pension right. Those authorities did not govern a payment relating to pension benefits yet to be earned through future service.
3. The Facilitation Payment was part of an integrated package concerning the rewards and benefits of future employment. It operated as an inducement to agree to changed future employment terms and was therefore from employment. The fact that some employees could leave before implementation and still receive payment did not prevent it being a taxable inducement. Shilton v Wilmshurst [1991] 1 AC 684 and Laidler v Perry [1966] AC 16 supported that conclusion.
4. The replacement principle derived from Mairs v Haughey [1994] 1 AC 303 was not an overarching rule. It was unnecessary to decide the case by identifying what the payment replaced. In any event, the First-tier Tribunal was entitled to regard it as replacing lower earnings needed to maintain future pension provision. Treating it as replacing employer contributions would not necessarily have produced the same tax exemption.
5. The First-tier Tribunal’s findings about the package and the future nature of the arrangements were sufficient. Any arguable failure to distinguish the Facilitation Payment from other elements of the package was immaterial.

• Court of Appeal (Civil Division): In [2023] EWCA Civ 1383, HMRC’s appeal was allowed. The Upper Tribunal’s decision was remade by dismissing E.ON’s appeal against the First-tier Tribunal.
• Upper Tribunal (Tax and Chancery Chamber): In [2022] UKUT 196 (TCC), E.ON’s appeal was allowed and the Facilitation Payment was held not to be from employment.
• First-tier Tribunal (Tax Chamber): In [2021] UKFTT 156 (TC), the payment was held subject to income tax and national insurance contributions.