SPC00538
INCOME TAX/ CORPORATION TAX  -  assessment/self-assessment  -  repair of self-assessment tax return  -  whether return complete  -  yes: reference to liability made in box relating to “Additional information”  -  whether amendment to return possible where enquiry opened and closed on incorrect premise  -  yes: return already included information to make the repair  -  appeal dismissed            

INCOME TAX/ CORPORATION TAX  -  pension schemes  -  privatisation of Scottish Bus Group Ltd  -  winding up of pension schemes  -  nature of “ex gratia” payments made by government to those previously entitled to pension benefits  -  whether individual taxable on “ex gratia” benefit so received pursuant to ICTA 1988, s.596A(2)  -  yes: benefit provided under “retirements benefit scheme”  -  appeal dismissed

EDINBURGH TRIBUNAL CENTRE

	JAMES S MOFFAT	Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Special Commissioner:  MICHAEL JOHNSON

Sitting in Edinburgh on 20 March 2006

The Appellant appeared in person

Andrew Young, counsel instructed by the Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Nature of the appeal

1.	This appeal concerns the correct tax treatment of a lump sum payment received by the Appellant in September 2002 and the contents of the Appellant’s tax return for 2002-03, in which reference was made to it.  I shall call that lump sum payment “the payment”.  Its amount is immaterial to the issues under appeal.

2.	There are two issues for decision. One is of a technical nature, as explained in paragraphs 29 and following below. The other, substantial, issue, explained in paragraphs 47 and following below, requires an examination of the circumstances in which the payment came to be made. 

The facts

3.	Save to the extent that appears below, I need make no findings of fact. The principal facts have been embodied in an Agreed Statement of Facts. There is also a Bundle of Productions, the contents of which it is agreed that I should accept at face value, without the need for proof.  I record that I have heard no oral evidence.

Origin of the appeal

4.	The genesis of this matter is as follows.

5.	The Appellant is a former employee of Fife Scottish Omnibuses Limited, a subsidiary of Scottish Bus Group Limited.  Following the enactment of the Transport (Scotland) Act 1989, Scottish Bus Group Limited was privatised, its various subsidiaries were sold, and it became necessary to decide what should be done about the occupational pension schemes to which employees and former employees of those companies had belonged.

6.	The Scottish Transport Group, which had operated the bus operations of Scottish Bus Group Limited pre-privatisation, had two pension schemes for its employees. The Appellant belonged to one of these, namely the Scottish Transport Group Pension Fund.  

7.	At the time of privatisation, in 1990-91, it was appreciated that a substantial surplus of funds would remain after full provision had been made for present and future liabilities under each of the pension schemes. The agreements entered into at the time provided for this surplus to be paid to the UK Exchequer following the winding up of the schemes.

8.	By 2000, the winding-up process had entered its final stages. The trustees of the schemes passed the surplus to Scottish Bus Group Limited, which in turn passed the surplus to the Scottish Transport Group. Scottish Transport Group remained in public ownership, so the recipient was in effect the Scottish Executive. The Scottish Executive made payment to the UK Treasury, as it was obliged to do.

9.	After deduction of tax, the net surplus so paid amounted to approximately £176 million.  

10.	In 2001-02, the pension-related consequences of the privatisation were finalised.  The Scottish Transport Group was dissolved.  Scottish Bus Group Limited was placed in liquidation. However, by that time, the existence of the surplus had become a highly political matter. The UK Treasury only accepted payment of the surplus on the understanding that a large part of the funds would be paid back, on an ex gratia basis, to members of the pension schemes.

The position in England and Wales  

11.	To appreciate the basis of this understanding, it is necessary to have regard to events south of the border, in relation to the National Bus Company’s pension scheme members in England and Wales.  What had happened was as follows.  

12.	The National Bus Company was privatised in the 1980s. As part of the privatisation, arrangements were made for securing the pensions benefits of National Bus Company employees. Pursuant to those arrangements, the surpluses of the two National Bus Company pension funds were paid to the UK government in 1989-90.   

13.	Following complaints, the Pensions Ombudsman instructed the trustees of the funds to seek repayment of the surpluses, which they did. In 1996-97, first Conservative and then Labour UK governments offered to fund a court action by the trustees to pursue their recovery.  The trustees accepted that offer.

14.	The Labour government’s desire to resolve the fate of the surpluses by agreement out of court was articulated by the Deputy Prime Minister in his speech to the 1998 Labour Party Conference.  In July 1999, following a settlement approved by the court, £356 million was paid by the government to the trustees of the pension funds, in order to resolve the dispute over the surpluses.  

15.	Disagreements still existed over the eligibility of certain individuals to participate in a distribution of those funds. The questions so arising were the subject of court proceedings in 2000. In 2000-01, the government lent its weight to a final distribution amongst persons agreed to be entitled to participate.

Consequences in Scotland  

16.	Against that background the government was at that time anxious to decide what to do about the Scottish pension fund surpluses with which I am concerned.  I find that the Scottish Executive agreed with the UK government in December 2000 that ex gratia payments should be paid to persons formerly entitled under the Scottish pension schemes, such payments to be broadly equivalent to the final settlement for the National Bus Company’s pension scheme members in England and Wales. At that stage, it was envisaged that up to £100 million would be made available for ex gratia distribution.   

17.	The payment of ex gratia sums reflected the fact that the Scottish Executive was without devolved responsibilities in this sphere. I am moreover told that there have never been court proceedings in Scotland equivalent to those pursued in England in relation to the National Bus Company’s schemes. It is common ground between the parties to this appeal that there has never been any legal basis on which employees or former employees of Scottish Bus Group Limited or its subsidiaries might have raised an equivalent claim.  

18.	I find that it was upon the ground of the desire to bring about equal treatment of Scottish bus company employees and former employees with their equivalents in England and Wales that the decision to provide for the ex gratia payments was made, rather than in response to or anticipation of any claim.  

19.	The difference between the Scottish solution and that in England and Wales has therefore been that, in contrast to England and Wales, the legal system in Scotland has not compelled the payment back by the crown to the pension scheme trustees of funds to be used to augment the benefit of pension scheme members, whether by consent or otherwise. In the situation with which I am concerned, payments have come directly from the government, and not via the pension scheme trustees.  

20.	In February 2002, the Scottish Public Pensions Agency sought to clarify with HM Revenue and Customs, as they now are – I shall call them the Revenue – what the difference in tax treatment might be between an English or Welsh recipient of such benefits on the one hand, and a Scottish recipient of an ex gratia payment on the other. It was appreciated that any disparity of treatment might be regarded as unfair, and the Agency wanted to avoid that consequence if possible.

21.	Scottish ministers and HM Treasury were in agreement that, to achieve an outcome for Scottish claimants of similar value to those receiving benefits in England and Wales following the National Bus Company litigation, £118 million of the Scottish surplus could be used for ex gratia payments. This represented an improvement on the ceiling of £100 million previously envisaged, but was agreed without a resolution of the impact of taxation in respect of the Scottish payments.

22.	The Scottish Public Pensions Agency produced and distributed to potential claimants of the Scottish Transport Group Pension Fund a booklet entitled “Notes on the Disbursement of Ex Gratia Payments”.  In the Introduction to that publication, the Deputy Minister for Enterprise, Transport and Lifelong Learning, Mr Lewis Macdonald MSP, wrote as follows, inter alia:

“In spite of the legal differences, Scottish ministers were determined that pensioners north of the border should not lose out.  We therefore negotiated with the Treasury for funds to pay for a programme of ex gratia payments to eligible members of the schemes. Our objective was to secure similar average payouts in Scotland as in England and Wales. In fact somewhat higher average payouts will be made, although some Scottish recipients will be liable to tax.”

23.	I have emphasized the final sentence of this quotation to reflect how, as I find, the different situation in Scotland was catered for by the government, so far as concerns tax on the ex gratia payments.  I find that it was thought by the minister that there would not, after all, be at the time of distribution a similar level of payments, on average, to those made in England and Wales.  Rather, it was intended that the level of payments should be higher than the average in England and Wales.  But the reverse of the coin, as I find, was that it was believed that some Scottish recipients would find themselves liable to tax on payments received.

24.	The amount available for ex gratia distribution was subsequently increased to £126 million. In a Scottish Parliamentary written answer given on 10 March 2003 to Mr Fergus Ewing, MSP for Inverness East, Nairn and Lochaber, Mr Macdonald stated that tax and equity issues formed part of the case made by Scottish ministers to the Treasury which secured additional funds of £26 million [sic] for distribution to Scottish beneficiaries.  I find that this reflects, if anything, the desire to do even better for Scottish recipients than the minister had expressed in his Introduction quoted above.   

Position of the Appellant

25.	The Appellant lodged a claim for an ex gratia payment, to which he was found to be entitled under the criteria established for eligibility.  Basic rate income tax was deducted at source from the payment. The principal issue before me is whether that course was correct, indeed whether the Appellant should have been liable to tax on the payment at all.  I am not otherwise concerned with the quantum of the payment.

26.	The Appellant, as I find, made reference to the payment in his self-assessment tax return for 2002-03. But he only did so in Box 23.5, entitled “Additional information”.  What he stated in that box was as follows:

“I received an ex gratia payment from the Scottish Executive on 6 September 2002 in the amount of [and he specified the precise amount], from which tax of [and he specified the precise amount of alleged tax] had been deducted, leaving a net amount of [and he specified the precise net amount].  

“According to my interpretation of current tax law, this sum should not be subject to tax and has therefore not been declared as a taxable sum in this return.  I am seeking repayment of the tax so deducted.”

27.	In January 2005, the Revenue opened an enquiry into the return, on the basis that the payment had not been included in it. In March 2005, they wrote to the Appellant to conclude the enquiry, and in the same letter they notified an amendment to the return, resulting in a further sum of income tax being due, and they specified the amount. 

28.	Later that month the Appellant appealed, firstly against the conclusion to the enquiry, and secondly against the amendment to the return.

Nature of the technical issue 

29.	In strict logic, it might be said that the Appellant had not included the amount of the payment in his return.  In Box 23.5, he had after all stated that he had not declared it as a taxable sum in his return.  But in another sense, he had included the payment in his return, simply by mentioning it in the way he did. The Appellant’s reasons for appealing against the conclusion of the Revenue enquiry were expressed as follows:

“The lump sum received was included in the return because the additional information box in which the sum was entered [ie Box 23.5] is an integral part of the return and appears before the signature of the taxpayer where he certifies that the information given in the return is correct and complete. The Revenue are incorrect in law to argue that Box 23.5 does not form part of the return.”

30.	At the hearing and in his skeleton argument, the Appellant has contended that, by opening their enquiry on the wrong basis, the Revenue forfeited the right to amend his tax return.  

Arguments of the parties: technical issue  

31.	At the hearing and in his skeleton argument, Mr Young of counsel, who appeared for the Revenue, accepted that the Appellant acted reasonably in the way that he completed his tax return, and Mr Young abandoned any assertion on his clients’ part that the return was incomplete.  

32.	The Appellant referred me to s 28A(2) of the Taxes Management Act 1970 (“the TMA”), under which a notice closing an enquiry must either –

a)	state that in the officer’s opinion no amendment of the return is required, or

b)	make the amendments of the return required to give effect to his conclusions.

According to the Appellant, if the enquiry was wrong from the start, so must the amendment be also.  

33.	In support of this argument, the Appellant referred me to s 9 of the TMA, as substituted by s 179 of the Finance Act 1994.  He also referred me to the Revenue’s 1995 guide to practitioners concerning the legal framework of self-assessment, and, in particular, the guide’s comments on the operation of s 9 by the Revenue.

34.	Unfortunately for the Appellant, as Mr Young pointed out, and as I accept, the Appellant’s argument is not supported by the guide to practitioners, because it deals with s 9 as originally substituted.  Section 9(4) dealt with the nine month period for amending self-assessments to correct obvious errors, and s 9(5) with the lack of power to amend during the currency of a Revenue enquiry. Both those sub-sections were repealed by the Finance Act 2001, in relation to returns whether made before or after, and whether relating to periods before or after, the passing of that Act.

35.	This inevitably made the Appellant’s technical argument difficult to follow, as it was grounded on the law as originally enacted, and not as it actually applied.  However, the argument amounted, I believe, to the following. Because the basis of the enquiry was misconceived, so the amendment to the return required by the Revenue was equally misconceived. The return should never have been amended, alternatively it should not have been amended without giving the taxpayer the opportunity to respond to the proposed amendment, which was never done. Therefore the amendment falls, once it is concluded that there was never a justification for the enquiry in the first place.

36.	Mr Young submitted that the expressed justification for the enquiry was irrelevant to the adjustment of the figures contained in the return so as to take into account the tax on the payment contended for by the Revenue, that is, the tax in dispute between the parties. 

Decision: technical issue

37.	As a matter of common sense, it is obvious that, in completing a self-assessment tax return, a taxpayer must be at liberty to state circumstances which may or may not have given rise to a liability to tax and, at the same time or in the next breath, deny that tax is or was due. The whole point of self-assessment is that one discloses the circumstances in which one is, or might be, liable for tax, and specifies one’s view of the resultant liability, which may be non-existent or nil. The return is, or may be, incomplete when one fails to do this, not when one does.   

38.	This approach was recognised by Mr Justice Goulding in his judgment in Dunk v General Commissioners for Havant (1976) 51 TC 519. That case concerned the extent to which a taxpayer was obligated to provide full information in his tax return.  In a passage at page 521 of the report, cited in Revenue Interpretation 191 (October 1998), the judge said this:

“If a taxpayer finds particular circumstances that make the best of his knowledge more than usually unreliable, it is open to him to put against his figure for a particular item of income such words as ‘estimated – see accompanying memorandum’, or something of that kind, and explain the circumstances.  If he has done his best, and, of course, he is under a duty to use all proper sources of knowledge – he will not, in my view, be guilty of making a false statement, providing, as I say, he puts in a genuine estimate and, if necessary, explains that it is not very reliable.” 

39.	In the present case, the Appellant has not, of course, relied upon an estimate of the tax that was or might be due in respect of the payment. Rather, he has specified a precise sum deducted from the payment on account of tax said to be due, and stated his belief that the sum was not properly deducted. But, in my view, the manner in which the return was completed by the taxpayer in the present case is within the general principle identified by the judge in the Dunk case.  

40.	Thus, the Appellant set out the circumstances of the payment, stated what the amount of tax was said to be, and explained his view as to the unreliability – ie incorrectness – of the deduction. In my view, that course was more than merely desirable: it was what was required of him. A sum had been withheld from the payment on account of tax. That sum required to be taken into account, either as tax duly received by the crown, or else as an amount unduly withheld by the crown as tax, as to the amount of which the taxpayer should therefore receive credit.   

41.	In which box should such information be included?  I do not think that it greatly matters, so long as the return is not confusing or misleading. In my judgment, everything above the declarant’s signature is part of the return, including Box 23.5.  Indeed, Box 23.5 is a logical one in which to include the payment, seeing that the taxpayer’s position is that he does not accept that the payment is taxable, and so seeks credit for the deduction referred to.

42.	It is a fact that the closure notice stated that the return did not include details of the payment – a conclusion that I have found to be wrong. The notice, moreover, required the return to be amended to include the payment – I have found that to be unnecessary. The notice then made the amendment that the Revenue required – this being to recalculate the assessment on the footing that the tax deducted from the payment was properly due.

43.	However, it seems to me that Mr Young is correct in submitting that, if the amendment was unnecessary, this must have been because the return already included all the information from which the tax payable by the Appellant should be apparent.  It follows that the inappropriateness of the enquiry is not determinative of the issue whether the Appellant should pay tax in respect of the payment, which is really the only issue for the tribunal to decide.

44.	Moreover it does not follow that an enquiry opened on an incorrect premise must preclude an amendment to a taxpayer’s return to give effect to his true liability.  Whilst that may in some cases be the consequence, it would not be so in a case like the present. That is because of the nature of the incorrect premise. The incorrect premise was, “You have not included in your self-assessment the tax due in respect of the payment, so we are opening an enquiry to include that tax.”  In this case, that is just an alternative way of saying, “You have said you are not liable for tax in respect of the payment mentioned in Box 23.5 of your self-assessment, so we are opening an enquiry because we say that you are so liable.” As I see it, the incorrect premise of the enquiry should not, on the latter footing, preclude a reworking of the figures included by the Appellant to give rise to a different end result from that self-assessed by him. 

45.	I do not understand there to be an issue as to the quantum of the amendment, if the Revenue are correct that tax was properly deducted from the payment in the amount specified by the Appellant in the return.  

46.	For the above reasons, I decide that, whilst the conclusion to the enquiry was wrong, the Revenue were entitled to repair the contents of the return to produce the conclusion as to the tax due contained in the closure notice.  This is, of course, subject to the decision in respect of the substantial issue, to which I now turn.

Nature of the substantial issue

47.	The Revenue submit that the payment was taxable to Schedule E income tax, pursuant to s.596A of the Income and Corporation Taxes Act 1988 (“ICTA”), as a benefit provided under a retirement benefits scheme. That provision has been repealed for income tax purposes from 2003-04, along with s.595 and s.596 of ICTA, but all these provisions were in force in relation to 2002-03, to which the tax return before me relates. 

48.	Section 595(1)(a) of ICTA provided for sums paid to an employee to be assessable as income of the employee under Schedule E, where made by the employer pursuant to a retirement benefits scheme with a view to the provision of any relevant benefits for the employee.

49.	Section 596(1) of ICTA provided that s.595(1) should not apply where the retirement benefits scheme in question was not (a) an approved scheme, (b) a relevant statutory scheme, or (c) a scheme set up by a government outside the UK for the benefit, or primarily for the benefit of, its employees.

50.	Section 596A(1) applied where the benefit provided under a retirement benefits scheme was not of a description mentioned in s.596(1)(a), (b) or (c).  In that case, tax was to be charged in accordance with the provisions of s.596A.  

51.	It is common ground between the parties to this appeal that neither s.595 nor s.596(1) applied to the payment, so potentially leaving scope for s.596A to apply. 

52.	The expression, “retirement benefits scheme” is defined, by s.611(1) of ICTA, as meaning a “scheme for the provision of benefits consisting of or including relevant benefits,” subject to certain specified exclusions, which it is common ground did not apply in the present case.

53.	Section 611(2) provides that references to a scheme include references to a deed, agreement, series of agreements, or other arrangements providing for relevant benefits notwithstanding that it relates or they relate only to –

a)	a small number of employees, or to a single employee, or

b)	the payment of a pension starting immediately on the making of the arrangements. 

54.	The expression, “relevant benefits” is defined, by s.612(1) of ICTA, as meaning inter alia “any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death … or in anticipation of retirement, or, in connection with past service, after retirement or death … .”

55.	The expression, “employee” is defined by s.612(1) as including –

a)	in relation to a company, any officer of the company, any director of the company and any other person taking part in the management of the affairs of the company, and

b)	in relation to any employer, a person who is to be or has been an employee;

and “employer” and other cognate expressions are to be construed accordingly. 

56.	These provisions, beginning with s.595, all fall within chapter I of Part XIV of ICTA.  That chapter is entitled “Retirement Benefit Schemes”.

Arguments of the parties: substantial issue  

57.	The Appellant submitted that these provisions did not bring the payment into charge. He submitted that the payment, not having been made by an employer to an employee, was not of the kind contemplated by the chapter or by any specific section or sections of it. He submitted that, in the case of the payment, the causal link between employer and employee was lacking, in that a third, disinterested party, namely the government, had been instrumental in making the payment.

58.	The Appellant submitted that the payment was political in nature. He referred me to the decision of Mr Julian Ghosh, Special Commissioner, in the appeal of Barclays Bank plc Trustees of the Barclays Bank Pension Fund v The Commissioners for HM Revenue and Customs (SpC 00520, released 29 December 2005), at [68], viz –

“The payments were made to assuage the perceived hostility of the pensioners and the trade unions who represented them. Although the payments would not have been made ‘but for’ the past services of those former employees who were pensioners, the payments were motivated by and paid by reason only of the wish of the plc to avoid the consequences of such hostility.”

59.	At [70], Mr Ghosh stated that s.612(1), in defining “relevant benefits”, was defining “benefits” –

“ … which have a sufficient connection to ‘past services’ to be characterised as effectively deferred emoluments (using the language of Schedule E).”

60.	The Appellant stated that Revenue practice had not been to treat payments not arising from the employer/employee relationship as falling within the scope of s.596A, and he submitted that that provision should not be construed in isolation so as to apply to payments made by the government or Scottish Executive. He characterised s.596A as a sweeping up, anti-avoidance provision designed to allow for tax in situations where benefits are provided by insurance, or other similar third party arrangements, rather than directly by employers.

61.	In short, the Appellant submitted that s.596A had no application to the payment.

62.	For the Revenue, Mr Young began by submitting that it was expected that tax would be chargeable in Scotland: hence the uplift in the fund available for payments to £126 million.  He referred to the agreement of December 2000 between Scottish ministers and HM Treasury, and the Scottish parliamentary answer dated 10 March 2003.  

63.	Regarding s.611(2), Mr Young submitted that the phrase “or other arrangements” was apt to include the ex gratia lump sum payments negotiated. He referred me to Commissioners of Inland Revenue v Morton [1941] SC 467, a decision of the First Division of the Court of Session.  In that case, the court had to consider the definition of “settlement” under the Finance Act 1938. The expression “settlement” was defined by s.41(4)(b) of that Act as including “any disposition, trust, covenant, agreement or arrangement.”  Lord Fleming, with whom the Lord President and Lord Carmont agreed, Lord Moncrieff dissenting, stated (at page 476 of the report) –

“According to the crown’s contention the word ‘arrangement’ correctly describes the transaction to which the respondent and his wife were parties.  In my opinion this contention is well founded.  I agree with the opinion expressed by the Master of the Rolls in the recent case of Commissioners of Inland Revenue v Payne (1940) 23 TC 610 that the term ‘arrangement’ is not used as a term of art but in a business sense, and I think that the transaction into which the respondent and his wife entered falls to be regarded as an arrangement of the nature of a settlement and therefore a settlement in the sense of the statute.”

64.	The “arrangement” in that case consisted of incorporating a private, unlimited company under the Companies Act 1929, to which the taxpayer and his wife sold certain assets. Payment was made by the allotment to them of all the issued preference shares in the company, and of blocks of ordinary shares to their children. As the parents through their voting rights controlled the continued existence of the company, and were in effect beneficially entitled to the company’s property in its entirety, all the dividends arising from the company were deemed to be their income for surtax purposes.  

65.	Referring next to the Barclays Bank decision of Mr Ghosh, at [60] and [69] – [72],  Mr Young invited me to adopt the interpretation of s.596A there mentioned by Mr Ghosh.  Mr Young submitted that the “benefit” received for purposes of s.596A did not itself have to be a “relevant benefit” within s.612(1). A “scheme” having some elements amounting to “relevant benefits” and others not so amounting was nevertheless a “retirement benefits scheme”. The definition of “retirement benefits scheme” is a scheme for the provision of benefits consisting of or including relevant benefits, so indicating that benefits received need not be “relevant benefits” for s.596A to apply.

66.	As to the scope of the expression “scheme” in s.611(2), Mr Ghosh decided, in the Barclays Bank decision at [76], that the “arrangement” referred to in the phrase “or other arrangements” in s.611(2) must be distinct from the “benefit”.  As it was put by Dr Brice in Allum v Marsh (Inspector of Taxes) [2005] STC (SCD) 191 at [76], the “scheme” must have a commercial life separate from the mechanics of conferring the benefit. That is a matter of fact in each case.  In the Barclays Bank case, the payments implemented a “plan” or arrangement constituted for their payment; by way of contrast, in the Allum case, no prior expectation of payment had been raised, hence the payments were not received “under” a “retirement benefits scheme.”

67.	Mr Young submitted that the payment received by the Appellant recognised his past service, was paid out in accordance with the Appellant’s previous entitlement under the pension scheme to which he used to belong, and was quantified by reference to his length of service. That, Mr Young submitted, sufficed to show “connection with past service” for the purpose of the definition of “relevant benefits” in s.612(1).

68.	Mr Young rejected the Appellant’s submission that the underlying centrality of the employer/ employee relationship was a requirement in order to characterise the payment as falling within s.596A.  He submitted that the charge to tax arose not by virtue of who set up the scheme, but simply by reference to the nature of the benefits provided under the scheme.

69.	The parties drew my attention to the fact that the decision of Mr Ghosh in the Barclays Bank case is currently under appeal.  In that case, Mr Ghosh held that the payments made were not “relevant benefits”, because they were not consideration for the past services of past employees.  He found that there were no other benefits received, relevant or otherwise. The scheme could not therefore be a “retirement benefits scheme” within s.611(1).

Decision: substantial issue

70.	In my judgment, the payment in this case satisfied the criteria for the charge to tax provided by s.596A.

71.	There was, in my view, a scheme for the provision of benefits consisting of or including relevant benefits, because there existed arrangements providing for relevant benefits, as mentioned in s.611(2).

72.	I reject the Appellant’s submission that those arrangements were required, either expressly or by implication, to be as between employer on the one hand and employee on the other.  Section 611(2)(a) and (b) respectively operated to qualify the scope of s.611(2) by broadening it, not by narrowing it. The conjunction “notwithstanding” shows that. It is clear that the sub-section envisages arrangements that do not just relate to a small number of employees, or a single employee. Those arrangements must allow for schemes for the provision of benefits consisting of or including relevant benefits, as defined in s.612(1), which can arise in a range of situations some of which will only be indirectly referable to the employer/employee relationship.

73.	I accept Mr Young’s submission that the legislation I am considering does not require that the deed, agreement, series of agreements, or other arrangements shall be with the employer or former employer. There is nothing in s.611(2) or elsewhere to suggest that.

74.	In my view, the arrangements for the payment are clear. What were they? They were those outlined by Mr Macdonald in his Introduction to the “Notes on the Disbursement of Ex Gratia Payments.”    

75.	The arrangements stemmed from the agreement between Scottish ministers and HM Treasury that effect would be given in Scotland to a distribution broadly equivalent to what had happened in England and Wales in the wake of the National Bus Company litigation. There was, most certainly, an expectation that such distribution would be made, such that it would be wrong to say, by analogy with the decision of Mr Ghosh in the Barclays Bank case, that the payments were really made to placate the recipients rather than in consideration for past services.  

76.	It is true that the payments made were ex gratia, but I am convinced, from the political history of the matter, that the government did not consider that it had any choice but to make the payments.  It acted as if it had no choice.  Indeed, when the differing tax impact of the Scottish payments was appreciated, the government reacted by adjusting the size of the fund upwards.

77.	In this case, the mechanics of payment were distinct from the arrangements made enabling the payments. That appears from the “Notes on the Disbursement of Ex Gratia Payments.” I accept Mr Young’s submission that the payment to the Appellant was in connection with his past service. That was how he qualified to receive the payment, and it was on the basis of his past service that the amount of the payment was arrived at.  I therefore hold that the payment satisfied the definition of “relevant benefits” in s.612(1).

78.	Having regard to s.611(1), it must be right that I am not concerned to inquire as to the other benefits paid, if I find that there was a scheme providing for “relevant benefits”, as I do. The scheme does not have to be entirely for providing “relevant benefits”, so long as it includes the provision of “relevant benefits.” This scheme clearly did include such provision, because the payment to the Appellant was of “relevant benefits.”  It was therefore a “retirement benefits scheme.”

79.	I therefore decide that the Appellant received a benefit under a “retirement benefits scheme.”  It was not of a description mentioned in s.596(1)(a), (b) or (c).  Tax therefore fell to be charged on the benefit, i.e. the payment, under s.596A.

80.	Section 596A(2) provided that, where the benefit has been received by an individual, as here, he should be charged to tax under Schedule E for that year.

81.	The outcome of this appeal is accordingly that the Appellant has not succeeded in his technical argument, nor has he succeeded in showing that the payment should have been tax-free. I decide that he was properly found to be liable for tax as specified in the closure notice, on the basis of his tax return as submitted.  It follows that he is not entitled to the tax refund sought by him.

82.	In these circumstances, I do not believe that it is necessary for me to quantify the tax.  If, however, any difficulty arises in that regard, I give the parties or either of them liberty to apply for that purpose.  If no such application is made within 28 days of the release of this decision, it will become final.       

MICHAEL JOHNSON
SPECIAL COMMISSIONER

RELEASED: 27 April 2006

SC/3146/2005