The test for the disability exemption is not an ‘all or nothing’ one.
In Howard-Ravenspine v HMRC [2023] UKFTT 471 (TC), an employee suffered from ill-health for a number of months during which time she received benefits under her employer’s private health insurance (PHI) scheme. The PHI provider was reluctant to continue to make regular payments under the scheme. As a result, the employer ended the employment under a settlement agreement. Specific wording was included in the settlement agreement recitals around the ill-health of the worker.
Under the settlement agreement, the worker would be paid accrued salary and receive a severance payment. The severance payment was paid ‘subject to deduction of such tax as was required by law on the balance of the severance payment in excess of £30,000’. Thereafter, the taxpayer wrote to HMRC to reclaim the taxes suffered on the payment, as she believed the payment fell into the scope of the disability payments exemption. HMRC duly processed a refund for the income tax deducted.
However, HMRC raised an assessment for the high income child benefit charge (HICBC) on the basis her income exceeded £50,000. The case centred around the application of ITEPA 2003 s 406(1)(B) (the disability exemption); if the exemption applied, no HICBC would be due.
Broadly, HMRC took the view that for the statutory exemption to apply, there must be an identified medical condition that disables or prevents the employee from carrying out the duties of the employment and the payment must be made on account of that disability and on account of nothing else. Its view was that, as the taxpayer’s settlement agreement stated the payment was labelled compensation for loss of office and termination, the exemption conditions were not met.
The First-tier Tribunal (FTT) referred back to the High Court’s decision in Horner v Hasted [1995] BTC 343 which looked at the predecessor to the disability exemption. It found that the guidance within EIM13630 had not ‘correctly encapsulated [the decision in Horner].’
In particular, the FTT stated (at paras 25 and 27) that ‘the text which concerns us most is their interpretation of what [HMRC] consider to be the second test. That test in Horner is whether the payer makes the payment “not merely in connection with the termination of employment but on account of the disability of the employee” ... This suggests to us, that HMRC have treated the second test as an “all or nothing” test’.
In the FTT’s judgment, that this was not the correct interpretation of the legislation, which should exempt from tax any payment which is made on account of a disability, irrespective of whether other payments are being made to the employee as part of the same deal. The judge also pointed out HMRC’s view was also inconsistent with other parts of the manuals (for example, EIM13637), which refers to the apportionment of such payments. As the taxpayer had sufficient evidence to validate the nature of the payment, it was found that the exemption should apply.
As well as confirming that the test for the disability exemption is not an ‘all or nothing’ one, this case highlights the limitations of relying solely on HMRC guidance. In also highlights the importance of robust documentation of payments, which enabled this taxpayer to successfully win her appeal.
The test for the disability exemption is not an ‘all or nothing’ one.
In Howard-Ravenspine v HMRC [2023] UKFTT 471 (TC), an employee suffered from ill-health for a number of months during which time she received benefits under her employer’s private health insurance (PHI) scheme. The PHI provider was reluctant to continue to make regular payments under the scheme. As a result, the employer ended the employment under a settlement agreement. Specific wording was included in the settlement agreement recitals around the ill-health of the worker.
Under the settlement agreement, the worker would be paid accrued salary and receive a severance payment. The severance payment was paid ‘subject to deduction of such tax as was required by law on the balance of the severance payment in excess of £30,000’. Thereafter, the taxpayer wrote to HMRC to reclaim the taxes suffered on the payment, as she believed the payment fell into the scope of the disability payments exemption. HMRC duly processed a refund for the income tax deducted.
However, HMRC raised an assessment for the high income child benefit charge (HICBC) on the basis her income exceeded £50,000. The case centred around the application of ITEPA 2003 s 406(1)(B) (the disability exemption); if the exemption applied, no HICBC would be due.
Broadly, HMRC took the view that for the statutory exemption to apply, there must be an identified medical condition that disables or prevents the employee from carrying out the duties of the employment and the payment must be made on account of that disability and on account of nothing else. Its view was that, as the taxpayer’s settlement agreement stated the payment was labelled compensation for loss of office and termination, the exemption conditions were not met.
The First-tier Tribunal (FTT) referred back to the High Court’s decision in Horner v Hasted [1995] BTC 343 which looked at the predecessor to the disability exemption. It found that the guidance within EIM13630 had not ‘correctly encapsulated [the decision in Horner].’
In particular, the FTT stated (at paras 25 and 27) that ‘the text which concerns us most is their interpretation of what [HMRC] consider to be the second test. That test in Horner is whether the payer makes the payment “not merely in connection with the termination of employment but on account of the disability of the employee” ... This suggests to us, that HMRC have treated the second test as an “all or nothing” test’.
In the FTT’s judgment, that this was not the correct interpretation of the legislation, which should exempt from tax any payment which is made on account of a disability, irrespective of whether other payments are being made to the employee as part of the same deal. The judge also pointed out HMRC’s view was also inconsistent with other parts of the manuals (for example, EIM13637), which refers to the apportionment of such payments. As the taxpayer had sufficient evidence to validate the nature of the payment, it was found that the exemption should apply.
As well as confirming that the test for the disability exemption is not an ‘all or nothing’ one, this case highlights the limitations of relying solely on HMRC guidance. In also highlights the importance of robust documentation of payments, which enabled this taxpayer to successfully win her appeal.
