Taxation of employer's buyout payment
Tribunal treats buyout of a pensioner's entitlement to retain Private Medical Insurance as an EFRBS.
The taxpayer, F, retired in 1995. It was agreed that F and his family could remain in membership of his employer's healthcare scheme, subject to payment of a contribution for doing so. In 2009, following a "thorough review" of its healthcare provision, the employer wrote to F, offering him the opportunity to leave the healthcare scheme in return for a one off payment of £29,783. F took independent legal advice, and decided to accept the offer. The parties entered into a compromise agreement (now renamed settlement agreements) on 30 December 2009. Because F's wife was entitled to benefit under the previous arrangement, she acknowledged the position and confirmed in writing that she accepted the position under the compromise agreement.
The employer paid the agreed amount, less a deduction for income tax, to F in January 2010. In September 2010 F completed his self-assessment tax return. He argued that the amount paid should be treated as compensation for the surrender of the right to the healthcare insurance, and that it should be taxed as a capital gain split equally between himself and his wife. Unsurprisingly, HMRC rejected that argument, and concluded that the payment was subject to income tax. Following a review, the case was brought to the First Tier Tribunal.
At the Tribunal, it was argued for F that the payment should be treated as a capital gain. In the alternative, it was contended that if the Tribunal did not agree to treat the payment as a capital gain, it should be treated as a payment on termination of employment, and only taxable to the extent that it exceeded £30,000.
For HMRC it was argued that the payment was clearly made to F alone, that it could not be subject to capital gains tax if income tax applied, and that the £30,000 termination payment threshold did not apply, because it was not a payment on termination of employment. In HMRC's view the payment was in connection with F's past employment, and therefore effectively an Employer Financed Retirement Benefits Scheme (EFRBS) and the payment should be taxed as income.
The Tribunal reviewed all of the relevant tax legislation. It was noted that for the purposes of an EFRBS, "scheme" could include a deed, agreement, series of agreements or other arrangements. The conclusion was that the compromise agreement was a "scheme" for the purposes of the legislation, and so it was necessary to consider whether the compensation payment was a "relevant benefit". After a review of s393B of the Income Tax (Earnings and Pensions) Act 2003, the Tribunal concluded that the payment was made in connection with F's past service (because it would not have arisen but for his employment), and met the definition of a relevant benefit. Consequently the compromise agreement was an EFRBS, and the payment under it fell to be taxed accordingly.
While F's arguments were inventive, few people would have expected him to succeed. However, while taxing the payment as income is the obvious route, it was surprising that this result was reached on the basis of a compromise/settlement agreement amounting to an EFRBS.
For further information on Employer Financed Retirement Benefits Schemes or any other pensions law queries please contact our Pensions team.
For any employment law queries, including on the taxation of settlement agreements and payments connected with employment, please speak to a member of the Employment law team who will be happy to assist, or refer you to our specialist Tax law team where appropriate.