Compensation or motivation?

The taxpayer company agreed to establish a joint venture with Scottish & Newcastle UK Ltd. Around 2 000 employees were transferred to the new venture.

The workers threatened industrial action because the benefits provided by the new business did not match up to those offered by Scottish & Newcastle.

After several meetings the taxpayer company agreed to make payments of £5 000 to each employee in consideration of the loss of pension rights.

However the tax treatment of that payment was disputed. The employees argued that the payments were made as compensation for their lost pension entitlements but HMRC insisted the payments arose from employment and were therefore subject to tax and National Insurance.

The First-tier Tribunal found the payments had been made to secure the motivation of the employees and were taxable as earnings from employment...