NEUBERGER J. - (1.) BY an originating motion dated 1 -11 -1998 the taxpayer, E. M. 1. Group Electronics Ltd., appealed from the decision of special commissioners dismissing an appeal against determinations under regulation 29 of the Income Tax (Employments) Regulations 1973 (S.1 1973 No. 334) and regulation 49 of the Income Tax (Employments) Regulations 1993 (S. 1. 1993 No. 744) in respect of payments made in lieu of notice to two employees of the taxpayer on the termination of their employments. The judge dismissed the appeal. By a notice of appeal dated 22 -4 -1998 the taxpayer appealed on the ground, inter alia, that the judge erred in law in holding that the payments in lieu of notice made by the taxpayer were emoluments from the employments of the relevant employees within the meaning of section 19(1) of the Income and Corporation Taxes Act 1988. The facts are stated in the judgment of Chadwick L. J. Andrew Thornhill Q. C. and Conrad McDonnell for the taxpayer. Launcelot Henderson Q. C. and Timothy Brennan for the revenue . Cur. Adv. vult. 16 July. The following judgments were handed down. Chadwick L. J. This is an appeal from the order made on 22 -10 -1997 by Neuberger J. on an appeal by E. M. I. Group Electronics Ltd. from the decision of the Commissioners for the special purposes of the Income Tax Acts. The appeal raises, once again, the question whether payments made to employees on the occasion of the determination of their employment are taxable under case I of schedule E as emoluments from that employment.
(2.) THE underlying facts are set out in an agreed statement which was before the special commissioners. They may be summarised as follows. 1. The relevant employees, Mr. A. G. D. Soames and Mr. J. D. Hussey, were employed by the taxpayer (then known as Thorn E. M. 1. Electronics Ltd.) at senior management level under contracts of employment which contained the following provision for termination: 'Notice of termination 'The senior manager is required to give the company three months' notice in writing of the intention to terminate employment. The company will give its senior managers six months' notice in writing of its intention to terminate employment, except during the first six months of service, when this will be reduced to three months' notice. 'The company reserves the right to make payment of the equivalent of salary in lieu of notice and to terminate employment without notice or payment in lieu for gross misconduct.' 2. Mr. Soames was given notice of termination of his employment, on grounds of redundancy, by letter dated 26 -3 -1987. At that date his salary was 25,000 per annum. His employment was determined with effect from the following day, 27 -3 -1987. The letter of termination informed him that : 'Under the terms of the company's severance payment scheme, you will receive the following payment : total redundancy payment including statutory redundancy payment of 3,592 12,500 payment in lieu of notice 12,500 Total 25,000 3. Mr. Hussey was given notice of termination of his employment, also on grounds of redundancy, by letter dated 19 -11 -1992. At that date his salary was 29,000 per annum. His employment was determined with effect from the end of that month, 30 -11 -1992. The letter of termination informed him that : 'Your salary will be paid up to and including 30 -11 -1992, but you are not required to report to work after today ... You will receive a cheque for 16,013.93. This, covers both redundancy pay and pay in lieu of notice. The payment of 16,013.93 was made up of redundancy pay ( 5,555.60 -the equivalent of 10 weeks salary) which included the statutory redundancy payment ; and payment in lieu of notice ( 10,458.33). The payment in lieu of notice was calculated as follows : Salary in lieu 6 months 14,500.00 less one week (to 30 November 1992) 555.56 13,944.44 less notional tax at 25 per cent. 3,486.11 10,458.33' 4. The deduction of notional tax in calculating the amount of the payment in lieu reflected a change in the taxpayer's practice which had been introduced in October 1991. Under the new practice, where an employee had been given notice to determine his employment with effect from a date which was before the end of the six -month notice period, the payment in lieu was calculated by deducting from the employee's basic salary for the remainder of the notice period an amount equal to the amount of tax which would have been deducted under P. A. Y. E. if he had continued in employment until the end of the notice period. The effect of the change was that, although Mr. Soames (whose employment was terminated before October 1991) had received a payment equal to the amount of his salary (for the period in lieu of notice) without deduction of tax, Mr. Hussey (whose employment was terminated after October 1991) received a payment equal only to the amount of his salary (for the relevant period) after deduction of tax. The change in practice does not affect the question whether or not the taxpayer is accountable for tax in respect of the payment made to the employee. It may affect the amount of tax for which the taxpayer is accountable (if at all); but that is not a question for decision on this appeal. 5. Determinations were made against the taxpayer, as employer, in respect of the tax year 1986 -87 under regulation 29 of the Income Tax (Employments) Regulations 1973 and in respect of the tax year 1992 -93 under regulation 49 of the Income Tax (Employments) Regulations 1993. Those regulations (the later of which replaces the earlier in respect of the years to which it applies) -made under what is now section 203(2) of the Income and Corporation Taxes Act 1988 -enable the revenue to recover from the taxpayer tax which (as it appears to the inspector) should, under section 203(1) of that Act, have been deducted from an employee's emoluments and which has not been paid to the collector. 3. The taxpayer appealed to the special commissioners against those determinations. There was no dispute that, if the payments in lieu were taxable under schedule E as emoluments within case I, the determinations were properly made. Nor was there any dispute that the payments were capable of being 'emoluments' within the meaning given to that expression by section 131(1) of the Act of 1988 : that is to say, 'all salaries, fees, wages, perquisites and profits whatsoever.' The only issue was whether the payments were properly to be regarded as emoluments from the employment in the context of section 19(1) of the Act : 'The schedule referred to as schedule E is as follows: 'Schedule E' '1. Tax under this schedule shall be charged in respect of any office or employment on emoluments therefrom which fall under any one or more of the following cases - 'Case I : any emoluments for any year of assessment in which the person holding the office or employment is resident and ordinarily resident in the United Kingdom . . .' It is common ground that, if the payments were not chargeable to tax under case I of schedule E, they would fall within section 148(2) of the Act ('Payments on retirement or removal from office or employment') - formerly section 187(2) of the Income and Corporation Taxes Act 1970. But tax is not charged under section 148(1) in respect of payments not exceeding 30,000 ( 25,000 in the tax year 1986/87) : see section 188(4) of the Act of 1988 and section 188(3) of the Act of 1970. Accordingly, not with standing the provisions of section 148, the payments to Mr. Soames and to Mr. Hussey -being less than the exempt sum -are not chargeable to tax unless they do fall within case I. It is the availability or non -availability of the exemption which gives practical importance to the question in dispute. The special commissioners, in a decision (1996) S. T. C. (S. C. D.) 455 given on 10 -9 -1996, held in principle that the payments to Mr. Soarnes and to Mr. Hussey were emoluments chargeable to tax under case I of schedule E. They dismissed the appeals against the determinations made by the inspector. The taxpayer appealed to the High Court under section 56A of the Taxes Management Act 1970. That appeal was heard by Neuberger j., who gave judgment (1997) S. T. C. 1372 on 22 -10 -1997. He dismissed the appeal and affirmed the decision in principle of the special commissioners. It is from that order that the taxpayer appeals to this court.
(3.) The question whether a payment to an employee is properly to be regarded as an emolument from his employment, for the purposes of what is now section 19(1) of the Act of 1988, was (I think) first considered by the House of Lords some 70 years ago in Hunter v. Dewhurst (1932) 16 T. C. 605. Since then the question has received consideration by the House of Lords on at least eight occasions -in Canteron v. Prendergast (1940) A. C. 549 ; Tilley v. Wales (1943) A. C. 386 Hochstrasser v. Mayes (1960) A. C. 376 ; Laidler v. Perry (1966) A. C. 16 Brumby v. Milner (1976) 1 W. L. R. 1096 ; Bray v. Best (1989) 1 W. L. R. 167 ; Shilton v. Wilmshurst (1991) 1 A. C. 684 and, most recently, in Mairs v. Haughey' (1994) 1 A. C. 303. In the last of those appeals Lord Woolf observed, at page 320, in a passage cited by the judge in the present case (1997) S. T. C. 1372, 1384 : 'this is an area in which there is an abundance of authority. It is not always easy to reconcile these authorities since as is to be expected they are frequently concerned with situations close to the borderline between payments which fall within and payments that fall without the statutory provision. It is possible to have almost an infinite variety of situations which, although they have common characteristics, as a matter of fact and degree fall on one side of the border or the other. In each case ultimately it is a matter of applying the statutory language to the facts.' There were, however, two passages in the earlier decisions which Lord Woolf identified as providing some general assistance. In attempting the task of applying the statutory language to the facts in the present case, it is helpful to have those passages in mind. The first is in the speech of Lord Radcliffe in Hochstrasser v. Mayes (1960) A. C. 376. After referring to what he described as glosses put upon the words of the statute -which, although of value as illustrating the idea which those words expressed, did not displace them -Lord Radcliffe said, at pp. 391 -392 : 'For my part, I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it is paid to him in return for acting, as or being an employee.' The second, in the speech of Lord Templeman in Shilton v. Wilmshurst (1991) 1 A. C. 684, 689, expresses the concept embodied in the statutory words : 'Section 181 (of the Act of 1970, now section 19(1) of the Act of 1988) is not confined to 'emoluments from the employer' but embraces all ,emoluments from employment ;' the section must therefore comprehend an emolument provided by a third party, a person who is not the employer. Section 181 is not limited to emoluments provided in the course of employment ; the section must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, secondly, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that an emolument 'from employment' means an emolument 'from being or becoming an employee'. The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived 'from being or becoming an employee' on the one hand, and an emolument which is attributable to something else on the other hand, for example, to a desire on the part of the provider of the emolument to relieve distress or to provide assistance to a home buyer. If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, then the emolument is not received 'from the employment'.' Lord Templeman recognised that the task of determining whether an emolument was paid for being or becoming an employee or was paid for some other reason was frequently difficult and could give rise to fine distinctions.;