Surrendered Benefit Subject to Income Tax
In Graeme Forsyth v HMRC, the Tribunal examined whether a one-off payment made by a former employer to a retired ex-employee was subject to income tax (IT) or capital gains tax (CGT).
- Mr Forsyth retired from Nestle UK Ltd in 1995. Whilst employed by the company, he had been a member of its healthcare scheme which provided healthcare to him and his wife.
- Mr Forsyth discovered that other ex-employees were still able to enjoy this benefit, and Nestle agreed to continue the use of this benefit provided that he made a contribution.
- Subsequently, Nestle offered Mr Forsyth the opportunity for him and his wife to leave the healthcare system in return for a one-off payment of £29,783, to which he agreed.
- Mr Forsyth completed his self-assessment tax return and included 50% of the payment as a capital gain, with his wife including 50% of the gain on her return. Their accountant argued that the one-off payment was compensation for the surrender of rights to medical care, therefore should be taxed as capital gains split equally between him and his wife.
- HMRC opened an enquiry into his return, and concluded that this sum should be liable to income tax
Mr Forsyth contended that the £29,783 should be subject to CGT rather than IT. Furthermore, if it was held that it was not subject to CGT, it should be treated as a payment on termination of employment and only subject to IT insofar as it exceeded £30,000.
HMRC argued that the compromise agreement was for Mr Forsyth alone and not jointly between him and his wife, therefore the payment should not be split equally. The £30,000 threshold for payment on termination of employment was also not appropriate as the payment was not made in respect of the termination of his employment, but was rather a payment made in connection with his past service.
The Tribunal agreed with HMRC that the payment was made to Mr Forsyth alone. It was held that the payment was a “relevant benefit” under ITEPA 200 s. 394 3 as it was made in connection with his past service with Nestle, therefore the amount of the benefit counts as employment income for the relevant tax year.