In practice, the Inland Revenue Department when assessing the taxability of termination payments will likely continue to consider each case on its own merits. Taxpayers, in determining whether a termination payment is subject to salaries tax, will need to consider all relevant documentation and their interpretation. With the law being clear, the question becomes one of fact and substance.
In addition to the above, the separation agreement also permitted the taxpayer to exercise share options granted to him during his employment. Vesting of the share options was accelerated to permit the taxpayer to exercise the options, which he duly did, giving rise to the share option gain in dispute. Of the sums above, Sum D and the share option gain were the two items in contention before the Board of Review and courts.
Both the Board of Review and Court of First Instance decided in favour of the Commissioner, which was subsequently overturned by the Court of Appeal (CA), which decided in favour of the taxpayer (i.e., that Sum D and the share option gain were not taxable). The Commissioner appealed the CA’s decision claiming the question put forward of great general or public importance, but leave was ultimately granted on the basis that it would be helpful for the CFA to follow up the decision in the Fuchs case.
The decision of the Court of Final Appeal
The CFA found that the CA was correct in holding that Sum D and the share option gain were not taxable. In coming to its decision, the CFA applied the principles established in Fuchs, that a payment made in return for acting or being an employee is taxable, whereas a payment that is “for something else” is not. In the Fuchs case, the terminal payments made to the taxpayer were provided for in his contract of employment and were held to be taxable.
With respect to Sum D, the Commissioner contended that, being in lieu of bonus, the sum was made in recognition of the taxpayer’s efforts and therefore taxable. The Commissioner also sought to apply a ‘substitution test’ extracted from Mairs v Haughey  1 AC 303, which would operate such that a sum made in true substitution of another, takes on the nature of the of the latter. In considering the substance of Sum D, the CFA referred to the facts and decision of the CA, which found no evidence that the employer’s results and his performance had been considered for the purpose of determining a bonus to him. Sum D had been determined arbitrarily and was of a different nature, paid to make him go away quietly.
With respect to the share option gain, the Commissioner put forward arguments placing emphasis on the fact that share options were originally granted during the taxpayer’s employment and therefore arose substantially from his employment. The CFA found otherwise, agreeing with the CA that acceleration of vesting leading to the share option gain was not to reward the taxpayer for past services (and clearly could not be for future services), but rather, was for something else – to make him go away quietly.
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