Georgia Hicks represents taxpayers in successful UT appeal considering the proper fiscal characterisation of payments related to changes in a pension scheme

The Upper Tribunal (“UT”) has handed down its decision in the appeal of E.ON UK Plc v HMRC (UT/2021/000161) in which it determined that certain payments made to secure employees’ agreement to changes in their pension schemes were not “from” employment within the meaning of s. 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.

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 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]).

Finding material errors of law, the UT remade the decision and concluded that the Facilitation Payment was not “from” employment but from something else, namely compensation for the adverse changes being made to rights and expectations in relation to pension arrangements (at [109]).

The Upper Tribunal decision analyses the ratio of the House of Lords in Tilley v Wales [1943] AC 386 (at [58]-[66]), considers the extent to which the replacement principle is a useful tool in answering the statutory question (at [35]-[36]) and, in drawing on Kuehne + Nagel Drinks Logistics Ltd v HMRC [2012] EWCA Civ 34, [2012] STC 840, gives guidance on the steps to take in ascertaining the reasons for a payment (at [78]).

Whilst the appeal itself was heard in respect of one scheme participant, this was a test case in respect of some 2,238 members.

This decision (click here for a copy of the full decision) will be of specific 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 Appellant.

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