Georgia Hicks represents taxpayers in Court of Appeal decision on the proper fiscal characterisation of payments related to changes in a pension scheme

The Court of Appeal recently handed down its decision in the case of HMRC v E.ON UK Plc [2023] EWCA Civ 1383 in which it determined that certain payments made to secure employees’ agreement to changes in their pension schemes were “from” employment within the meaning of  s.9(2) Income Tax (Earnings and Pensions) Act 2003 and s.3(1)(a) of the Social Security Contributions and Benefits Act 1992.


Seeking to reduce the costs of running its Defined Benefit scheme, E.ON proposed certain changes to the way the members of two different categories of that scheme (the Final Salary category and the Retirement Balance category) could build up their benefits in the future. In short, their pension terms would be less beneficial, and their pension rights less valuable. To secure employees’ consent to these changes, E.ON offered them a one-off Facilitation Payment equivalent to 7.5% of their salary. This payment was paid as part of “an integrated package”, which included a salary increase and promises not to propose further changes to the pension arrangements for some years.

FTT and UT

On considering the nature of, and reasons for, this Facilitation Payment, the FTT (Judge Anne Redston) found that it was “from” employment. The UT allowed the taxpayer’s appeal, finding that the FTT erred in law in its analysis because: (1) as a result of its misapprehension of the law (it construed the ratio in Tilley v Wales [1943] AC 386 too narrowly) it discounted the adverse changes to pension arrangements as a possible source for the Facilitation Payment and (2) it made an analytical error by treating the fact the payment was paid as part of a package meant it bore the same fiscal character as other elements in the package (at [96]).

Court of Appeal

The Court of Appeal (Falk, Nugee and Lewison LLJ) recently overturned the UT’s decision and reinstated that of the FTT. In short, it decided that the decision of Tilley v Wales was not binding as the ratio was limited to payments made in consideration of changes to accrued pension rights, whereas the facts of this case were different: the changes to the pension scheme could not be said to affect either accrued or even contingent rights. What was affected was “pension benefits related to future service with E.ON” (para 46). This is despite findings of fact that the employees had more than expectations as to how their pensions would accrue in the future, which is why their agreement to the changes had to be secured. While rejecting E.ON’s submissions that the ratio in Tilley was authority for a broader principle, the Court gave no reasoned judgment as to what the reasoning behind Tilley was, or what principles may be taken from it.

Further, the Court of Appeal found that: (1) the FTT did not err in applying the replacement principle, which has limits to its utility (para 48); and (2) the payment was “from” employment as it was paid as part of a package “related to the rewards and benefits of future employment with E.ON” (which included a pay increase for all employees), it amounted to “an inducement to work willingly for the future” (per Falk LJ at para 51).

This decision goes against the decision in Kuehne + Nagel Drinks Logistics Ltd v HMRC [2012] EWCA Civ 34, [2012] STC 840 and arguably broadens the scope of whether payments related to pension changes are “from” employment.

Whilst the appeal itself was heard in respect of one scheme participant, this was a test case in respect of some 2,238 members. The decision (here) will be of interest to any taxpayers making payments to secure changes to their pension schemes, as well as of general interest to any practitioners interested in the proper fiscal characterisation of employment-related payments.

Georgia Hicks was junior counsel to the taxpayer, E.ON UK Plc

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