Veitch Penny LLP - Exeter | Crediton, Devon

Case

Venables v Hornby (HM Inspector of Taxes) - Court of Appeal (18/09/02)

Issues

(1) Pensions and retirement - income tax
(2) Executive director remained as non-executive director
(3) Payments not authorised by rules of scheme
(4) Section 600 of Corporation Taxes Act 1988

Facts

The claimant retired as executive director of his company in June 1994 and continued to work for the company as an unpaid non-executive director. He was 53 years old and in poor health. The company had a pension scheme of which he was a trustee. The scheme was set up to provide for relevant benefits under section 26 (1) of the Finance Act 1970 (now the 612(1) of the ICTA 1988).

The scheme was approved by the Inland Revenue as an exempt approved scheme for the purposes of income tax. The trust provided that the trustees had a direction to award an immediate payment to any member who retired at or above the age of 50 in normal health. They made several payments to the claimant following his retirement in respect of which the Revenue assessed him for income tax on the basis that the payments made were not expressly authorised by the rules of the scheme. The Special Commissioners held the assessment on the basis of the claimant having retired in June 1994 had not been in normal health and so the power to pay an immediate pension had not been exercisable.

The claimant appealed and it was held that the payments were authorised by the scheme. The Revenue appealed further and contended that the Claimant had not retired in June 1994 and that the payments had been made in breach of the rules of the scheme.

Decision

The Court of Appeal held that the payments were not authorised by the rules of the scheme as they had not been paid to a member who had retired. Under section 26 (1) of the Finance Act 1970 service was defined as "service as an employee of the employer in question" and a distinction had been given as to benefits paid for those "on retirement" and those "given on any change in the nature of service". Retirement meant retirement from service as an employee of the employer in question and it could not include a change in the nature of the service. On these facts there had been no cessation of service as an employee of the company as he had continued to hold office as a non-executive director. There was nothing in the rules to suggest retirement meant anything other than cessation of service.

Accordingly the payments were caught under Section 600 of the ICTA 1988 which imposed a charge to tax for payment for the benefit of an employee was paid out of funds held for an approved scheme and the payment was not expressly authorised by the rules of the scheme.

Comments

It is important for any employee taking early retirement to ensure that there is a proper 'retirement' within the Rules of his Employer's Pension Scheme to avoid any payment to him being taxable.