Upper Tribunal Tax and Chancery Chamber

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

Fecha: 16-Oct-2024

Legal principles relevant to test for earnings

Legal principles relevant to test for earnings

66.

There was no dispute between the parties about the applicable legal principles relevant to the test for earnings, with it being agreed that the key test is that set out by Lord Hodge at [58] in Rangers SC. We do not need to look further at other cases, but Mr Waldegrave recognised that in Marlborough UT the UT had endorsed the analysis in Marlborough FTT.

67.

It is also relevant (and possibly not controversial):

(1)

As emphasised by Lord Hodge in Rangers SC at [11] “the courts at the highest level have repeatedly warned of the need to focus on the words of the statue and not on judicial glosses…”.

(2)

Whether an amount is earnings is fact-sensitive, and as a consequence an appellate court or tribunal should be slow to interfere with the conclusion of the fact-finding tribunal. This can be illustrated by the decision of the UT in Marlborough UT. The FTT had concluded that the relevant sums were not paid to Dr Thomas as a reward for his services as director but were distributions made as a return on his shareholding in MDPL. The UT at [67] recorded that Mr Ghosh for HMRC had mounted what was, effectively, an Edwards v Bairstow challenge regarding some of the FTT’s findings of fact. The UT said that the FTT had been faced with an evaluative judgment, and made an evaluative decision in the light of all the relevant evidence with which the UT should be reluctant to interfere.

(3)

Referring to Lord Hodge in Rangers SC at [13] to [15], the approach to statutory construction is that we should decide, on a purposive construction, exactly what transaction would answer to the statutory description and then decide whether the transaction in question did so. There was no suggestion that any part of the arrangements was a sham, but Lord Hodge said that this was not the point ([16]). Lord Hodge referred at [65] to the chance that the trust company might not agree to set up a sub-trust, and the chance that the trustee of a sub-trust might not lend the money to the footballer; but that chance did not alter the nature of the payments to the trustee of the principal trust.

(4)

For an amount to constitute diverted or redirected earnings it was not necessary for there to be a pre-existing contractual entitlement. Mr Waldegrave submitted that this was apparent from Lord Hodge’s analysis of the position in relation to the executives (where there was no side letter) at [66].

(5)

KNDL shows that it is open to a tribunal to conclude that a payment is “from the employment” even if there are other reasons. Patten LJ at [56] said “Employment does not have to be the sole cause but it does have to be sufficiently substantial as to characterise the payment as one from employment.”

68.

The key question is whether the Payment to the Trustee is one of earnings. In answering the question, a tribunal can look downstream. However, once the Payment is earnings, it is irrelevant whether amounts paid out by the Trustee are paid out as loans or as gifts.

69.

Mr Waldegrave explained HMRC’s position in relation to whether a loan can be taxable as earnings as follows. A loan is taxable earnings if it is earnings or is a payment of an amount of earnings. There must be an amount which is earnings within s62(2) and that amount must be received:

(1)

For the earnings limb, to be earnings an amount must be a reward or remuneration for services, in line with the principles summarised in Rangers SC.

(2)

As to whether an amount is received, Mr Waldegrave referred us to the legislative provisions and authorities:

(a)

Section 15 applies to general earnings for a tax year in which the employee is UK resident, and s15(2) provides that the full amount of any general earnings within s15(1) which are received in a tax year is “taxable earnings” from the employment in that year.

(b)

Section 18 then contains the rules determining when money is treated as received, and Rule 1 is that this is the “time when payment is made of or on account of the earnings”. This makes it clear that there is a requirement for payment.

(c)

In Rangers SC Lord Hodge referred at [52] to the decision of Walton J in Garforth v Newsmith Stainless Steel Ltd [1979] 1 WLR 409. A taxpayer company voted to award bonuses and credited the sums to accounts with the company from which the employees were free to draw. The directors did not draw on those sums. Walton J held that there was no need for the directors to withdraw the money for there to have been a payment by the company; when money is placed “unreservedly at the disposal” of directors, that is equivalent to payment. Lord Hodge considered that this gloss on “payment” was a practical and sensible one. Lord Hodge also referred at [53] to Aberdeen Asset Management plc v HMRC [2014] SC 271 (“Aberdeen Asset Management”) where Lord Drummond Young at [34] identified the crucial question as “whether funds have been placed in a position where as a practical matter they may be spent by the employee as he wishes; it is at that point that the employee can be said to obtain the benefit of those funds”. There, the issue was whether the money in an Isle of Money company, whose shares the employee had acquired through the scheme, was to be treated as being received by the employee so that there was “payment”. Mr Waldegrave submitted that this interpretation of “payment” did not answer the question in Rangers SC, but it does show that the question of payment is a practical one, which must be viewed realistically.

70.

HMRC’s position is that whilst it is fact-sensitive, a loan could amount to a payment of earnings. That would, most obviously, be the case where, although the loan is a “genuine loan”, viewing the facts realistically, it is unlikely ever to be repaid. That does not mean that every time a company makes a loan to an employee there would be taxable earnings.

71.

Mr Waldegrave also gave the example of an employee working for national minimum wage but also being lent an additional sum that is calculated by reference to hours worked in a year. Mr Waldegrave described this loan as a genuine loan (explaining that it was accepted to have the legal character of a loan), but also submitted that there would be a clear understanding that it is not going to be repaid and as a practical matter can be spent by the employee as he wishes.

72.

In submitting that, if there are earnings, the payment of them can be achieved in a multitude of ways, and one of those can be the making of a loan, Mr Waldegrave recognised that this would have to be the “right kind of loan” and this will depend on the facts. In this case, HMRC’s position was that the Loan was the right kind of loan and the principal of the Loan was the taxable earnings of MC.