UT (Tax & Chancery) UT/2023/000098 - [2024] UKUT 00404 (TCC)

Earnings are defined differently for the purposes of income tax and NICs. Income tax is chargeable on earnings under Chapter 1 of Part 3, which consists of s62 as set out at [8] above and which is an exhaustive definition (using “means”). For NICs purposes, earnings are defined in s3 SSCBA 1992, as set out at [10] above, and which is an inclusive definition. Nevertheless, it was common ground, and we agree, that there should be no difference in outcome between the two determinations which have been issued by HMRC. Other than in our summary of the Decision at [11] to [29] above where we have used the terminology which was used by the FTT, we use “earnings” to refer to earnings within s62(2) and s3 SSCBA 1992.

As is clear from the summary of the parties’ submissions above, Mr Elliott and Mr Waldegrave differed as to the conclusion that was reached by the FTT – both as to whether the FTT had found that it was the Payment or the Loan that was earnings, and the applicable limb of the definition in s62(2) which had been found to apply. We are able to deal with those aspects of their submissions briefly.

The FTT had identified the issue at [14] as “whether the sole or a substantial reason why the Payment was paid by the company to the EBT as part of the arrangements” was because it was a reward or benefit for MC, set out its intended approach at [22] to [23], and having carried out that exercise, records its conclusion at [57] that “the Payment, therefore, was paid by the company as a reward for the services supplied by MC to the company”.

We consider it to be clear that the conclusion reached by the FTT was that it was the Payment that comprised earnings. We do not accept Mr Elliott’s submissions to the contrary: most of those submissions, including those by reference to the FTT having asked itself the question whether the Loan was a reward or benefit (at [33] to [37]) and then having referred to the conclusion it had reached at [56], relate to the reasoning of the FTT in reaching its conclusion, and thus whether any error of law was material such that the Decision should be set aside and we address them in that context.

We also agree with Mr Waldegrave that the FTT decided that the Payment comprised earnings within s62(2) generally, and did not find that it was within any particular limb of that sub-section. Mr Elliott was correct to observe that s62(2)(b) is the only limb to which the FTT referred expressly, having stated at [12] that “In our view too, any benefit falling within s62(2)(b) ITEPA is also highly relevant in this case”. This statement by the FTT is not explained further, and no further reference is made by the FTT thereto. Section s62(2)(b) provides that “any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth” constitutes earnings. It is the only limb where, as observed by Lord Hodge at [45] in Rangers SC, Parliament has required that the benefit be obtained by the employee, in contrast to the more open definitions in s62(2)(a) and (c). In the context of the Payment, which was made to the Trustee and not directly to MC, the FTT’s identification of limb (b) as “highly relevant” is difficult to explain. However, the FTT then stated it would use the expression “reward or benefit” as “shorthand for the provisions of s62 ITEPA as interpreted in Rangers” and thereafter uses that phrase, and sometimes just “benefit”. The FTT thus moved away from any focus on any particular limb of s62(2), and the conclusion the FTT reached was then expressed in general terms as the Payment being “earnings” at [57]. Accordingly, we reject Mr Elliott’s submission that the FTT had decided that there were earnings within s62(2)(b).