SHILTON vs WILMSHURST (INSPECTOR OF TAXES).

6 December. The following judgments were handed down.

SIR NICOLAS BROWNE-WILKINSON V. C. This is an appeal by the Crown from a decision of Morritt J. The judge allowed an appeal by the taxpayer, the England goalkeeper Peter Shilton, from a decision of the general commissioners for the division of South Nottinghamshire that a payment of 75,000 made by Nottingham Forest Football Club to the taxpayer on his transfer from Nottingham Forest to Southampton Football Club was an emolument of the taxpayers employment with Southampton and therefore taxable under Case 1 of Schedule E in section 181 of the Income and Corporation Tax Act 1970.

The case stated is reported at [1988] STC 868; The relevant facts are stated by the judge [1989] 1 W.L.R. 179 in his judgment, at pp. 180-181, from which I take the following summary. By a contract dated September 28, 1979 the taxpayer had contracted to play as a professional footballer for Nottingham Forest until July 31, 1983. By the rules of the Football League, the taxpayer would be entitled from July 1983 to sign up with the club of his choice without that club being under any obligation to pay any transfer fee to Nottingham Forest. By July 1982 Nottingham Forest were under some pressure to raise money by the sale of players and to reduce their wages bill. In or about July 1982 the manager of Nottingham Forest received an offer from Southampton for the transfer of the taxpayer from Nottingham Forest to Southampton at a transfer fee of 325.000 subject to terms being agreed between the taxpayer and Southampton. This offer was accepted by Nottingham Forest. On the taxpayers return from holiday, the manager of Southampton told him that a transfer had been agreed upon subject to the taxpayer and Southampton agreeing to the terms of his new employment. The taxpayer in discussion with the manager of Nottingham Forest indicated that he would be prepared to move if the terms were right. The manager of Nottingham Forest indicated to the taxpayer that should the taxpayer agree to the terms for his employment with Southampton, Nottingham Forest might be willing to make a payment to the taxpayer for consenting to a transfer. The taxpayer agreed to the terms of his employment with Southampton which included a signing-on fee of 80,000. Following that agreement the taxpayer agreed with the manager of Nottingham Forest that Nottingham Forest would pay the taxpayer 75,000 if he agrees to his transfer to Southampton. On August 13, 1983 the taxpayer entered into his new contract with Southampton and on August 19, 1982 the board of Nottingham Forest agreed to pay the taxpayer the 75,000 ("the Nottingham Forest payment") which was duly paid shortly thereafter.

The deal was attractive to Nottingham Forest because that club would receive a net sum of Rs. 250,000 (after making the Nottingham Forest payment) whereas if the taxpayer left them the following year they would receive nothing. The commissioners also found that the deal was attractive to the taxpayer : his new contract with Southampton gave him security for four years; the terms of his employment with Southampton were an improvement on those he was currently enjoying with Nottingham Forest and he would receive the signing on fee of Rs. 80,000 payable to him by Southampton.

After pointing out that the negotiations had three component parts, the commissioners found as facts :

"5(i) Although there were three parts of the negotiations these parts should be looked at as a whole as if agreement had not been reached between the appropriate parties on each part, then the whole would have failed... (j) The payment by Nottingham Forest to the [taxpayer] was an inducement to him to play football for Southampton and as such an emolument flowing from that service which he was to render to Southampton."

The conclusion of the commissioners was that the Nottingham Forest payment was chargeable to tax u/s 181 of the Act of 1970 "as an emolument of his employment with Southampton."

It must be stressed that in this case the taxpayer had two employments : one with Nottingham forest, the other with Southampton. Although the Nottingham Forest payment was made to the taxpayer by Nottingham Forest, the Crowns claim is not that it was an emolument of his employment with Nottingham Forest, but that it was an emolument of his employment with Southampton. It is common ground that, if the Crowns claim is wrong, the Nottingham Forest payment is assessable to tax u/s 187 of the Act of 1970 as a "golden handshake" from Nottingham Forest but there will be certain tax reliefs which are not applicable if the Nottingham Forest payment is to be treated as an emolument of the taxpayers employment with Southampton.

Section 181(1) of the Act provides that tax under Schedule E "shall be charged in respect of any office or employment on emoluments there from..." Section 183(1) provides that "emoluments" shall include "all salaries, fees, wages, perquisites and profits whatsoever." It is not in dispute that the Nottingham forest payment was an emolument. The sole question is whether the Nottingham Forest payment was a payment in respect of the taxpayers employment with Southampton and arose "therefrom."

The judge held that the Nottingham Forest payment was not an emolument "from" the taxpayers employment with Southampton. Whilst he accepted that a payment to an employee by someone other than the employer can be an emolument of that employment, he held that the Nottingham Forest payment could not be so characterised because the payer-Nottingham Forest-had no direct or indirect interest in the performance of the taxpayers contract with Southampton; the sole interest of Nottingham Forest was that the taxpayer should enter into, as opposed Nottingham Forest became entitled to the payment of Rs. 325,000 by was of transfer fee.

The Crown submitted that the judge, in so holding, was either improperly interfering with the commissioners decision on a question of fact or laying down an erroneous proposition of law, viz., that a payment by a third party can never be an emolument from employment unless such third party has an interest in the performance by the employee of the contract of employment. The Crown submitted that such proposition of law is only maintainable if an emolument can only be treated as arising "from" the employment if it is a reward for services past, present or future. It was submitted that two recent cases, Hamblett v. Godfrey [1987] 1 W.L.R. 357 and Bray v. Best [1989] 1 W.L.R. 167, show that payment can be a taxable emolument even though it is not paid or received as a reward for services.

It is necessary first to consider how the law stood before those two recent cases. There is a wealth of authority on the question whether an emolument arises "from" employment. All recent cases stress that ultimately one must come back to the words of section 181 and ask whether the emolument arises "therefrom," i.e., from the office or employment. But although that is the ultimate question, helpful guidance can be obtained from the authorities. The first point, which is not in dispute, is that the question has to be looked at from the standpoint of the person who receives the payment, i.e., the employee : per Viscount Simonds in Hochstrasser v. Mayes [1960] A.C. 376,390. Next, although the words of the statute are the ultimate test. The idea which is expressed by those words is usefully illustrated by judicial glosses which indicate that the payment must have been received by the employee "as such" or "in his capacity of employee" or "by way of remuneration for his services :" per Lord Radcliffe in Hochstrasser v. Mayes, at p. 391. Recently the gloss or interpretation of the statutory words most often referred to is that of Lord Radicliffe who, speaking of the statutory words, said, at pp. 391-392 :

"For my part, I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee."

This test is the one on which the Crown relied in the present case.

The plainest example of a taxable emolument is remuneration paid to the employee by the employer. But it is establishment that, even if the payment to the employee is made by someone other than the employer - e.g., tips to a taxi driver-such payment may be taxable u/s 181 : Calvert v. Wainwright [1947] K B 526. Even though the payment is not made by the employer, the tip is in essence a reward for the performance of the employment. We were not referred to any case where a payment made by a third party was held to be taxable where the reason for the payment was anything other than a reward for services past, present or future.

Again, in my judgment it is established by the authorities that a payment made by an employer to induce someone to become his employee may, but not necessarily will, be a taxable emolument of that employment. The question in such a case is whether the reason for the payment is to induce the employee to give up some existing personal advantage, e.g., self-employed or amateur status, or whether it is a payment referable to services thereafter to be rendered under the contract of employment. Applying the approach of Lord Diplock in Tyrer v. Smart , 114, in the former case the payment is not "a reward or return for the employees services whether past, current or future" but is bestowed on the employee "for some other reason :" see Hose v. Warwick (1946) 27 T.C. 459 and Jarrold v. Boustead [1964] 1 W.L.R. 1357. In the latter case, the payment may be taxable, even though the employee is giving up certain rights in accepting the employment, if it is impossible to server the consideration for the giving up of those rights from the element of future remuneration : Glantre Engineering Ltd. v. Goodhand (1983) 56 T.C. 165.

Until the decision in Hamblett v. Godfrey [1987] 1 W.L.R. 357 there was no case in which a payment to an employee was treated as a taxable emolument "from" the employment where the payment was anything other than a reward for services rendered or to be rendered under the contract of employment. The authorities plainly indicated that there might be payments other than by way of reward for services. But such a case had not arisen. This accounts for the frequent description of a taxable payment as being "remuneration for his services" (per Viscount Cave L.C. in Seymour v. Reed [1927] A.C. 554, 559), a "reward for services" (per Viscount in Simonds in the Hochstrassers case, at p. 388, and Lord Russell of Killowen in Brumby v. Milner [1976] 1 W.L. R. 29, 36) or a "reward or return for the employeess services :" per Lord Diplock in Tyrer v. Smart [1979] 1 W.L.R. 113, 114. Although the ultimate test is to apply the words of the statute, the decided cases down to that date all indicated that the idea lying behind the statutory words involved the concept of reward for the services, Past, present or future, to be rendered under the contract by the employee.

In my judgment, were it not for the two recent decisions on which the Crown relied, the Nottingham Forest payment in this case would not have been held to be a taxable emolument. The Nottingham Forest payment was neither paid nor received as a reward or return for the performance by the taxpayer of his services as a footballer playing for Southampton. It was a reward paid by Nottingham Forest to induce him to sign a contract with Southampton, the mere signing of that contract, whether subsequently performed or not, giving rise to the receipt by Nottingham Forest of the transfer fee, that being the sole objective of Nottingham Forest in making the payment to the taxpayer. The Nottingham Forest payment was not received as a reward for the taxpayers services to Southampton but for his agreeing to be transferred, i.e., to terminate his employment with Nottingham Forest and enter into a contract with Southampton. Nottingham Forest, having no interest in the performance of the taxpayers employment with Southampton, could not be making the Nottingham Forest payment as a reward for such services. Accordingly the Nottingham Forest payment did not arise "from" the taxpayers employment with Southampton but "for" agreeing to enter into that contract. The finding in the case stated that the payment was "an inducement to him to play football for Southampton" is not in law decisive of the question whether it is a taxable emolument. Such an inducement may or may not be taxable, depending on whether the inducement is referable to the services to be rendered under the employment or to some other cause.

It my judgment the state of the law as it existed before the two recent decisions is accurately and illuminatingly stated by Megarry J. in Pritchard v. Arundale [1972] Ch. 229. In that case the taxpayer, who was a self-employed accountant, was induced to take up employment with a company in return for the transfer to him of some shares in the company by a shareholder. The judge upheld the commissioners decision that the shares were not a taxable emolument and said, at pp. 240-241 :

"Second, to return, as always one must, to the language of the statute, the payment must be an emolument from the office or employment; and I do not think from means for. In other words, the payment must be made in reference to the services rendered under the office or employment, and as a reward for them, and so in that sense flow from the office or employment; and this is not the same as a payment made for undertaking the office or employment. I am not saying that merely because some benefit is, as it were, a premium or other initial payment in return for entering into a contract of employment it is not taxable. Remuneration for services is still remuneration for services, even if paid in a lump sum in advance. But whereas it will normally be very difficult to demonstrate that periodical payments made by an employer to an employee during the employment are anything but payments taxable under Schedule E, the fact that a payment is in the form of a lump sum paid at or before the commencement of the employment is a factor which, taken with other factors, may exclude Schedule E. If that Schedule is to apply, what the payments must relate to, and reward, is not the mere existence of a contract of service, nor merely entering into such a contract, but the services rendered or to be rendered under the contract."

The Crown submitted that whilst the decision in Pritchard v. Arundale may well be correct, That statement of the law by Megarry J. Is shown to be erroneous by the two recent decisions since it is dependent for its reasoning on the basic assumption that, to be taxable, the payment must be a reward for services. In Hamblett v. Godfrey [1986] 1 W.L.R. 839 : [1987] 1. W.L.R. 357 the Crown, as employer, had offered Rs. 1,000 to all its employees at G.C.H.Q. who were prepared to continue to perform their existing contracts of service while giving up their rights under such contract to belong to a trade union and certain other statutory rights of employees. The special commissioners held that such a payment was not a taxable emolument as it had not been received as remuneration or reward for services. On appeal their decision was reversed by Knox J., whose decision was upheld by the Court of Appeal, on the grounds that the answer to the question : was the payment by way of remuneration or reward for services ? is not legally determinative of the question : is the payment taxable ? : see per Know J. [1986] 1 W.L.R. 839, 845C, 846H approved by Balcombe L.J. [1987] 1 W.L.R. 357, 371 and Neill L.J. at p. 370. The Court of Appeal then applied the statutory words and the guidance provided by the authorities and held that as the payment was solely referable to the employment and to changes in conditions of service it necessarily arose from the employment. Neill L.J. said, at pp. 370-371 :

"Accordingly, if I may adopt the language of Lord Radcliffe in the passage I have referred to [in Hochstrasser v. Mayes [1960] A.C. 376, 391], the payment to the taxpayer was made in return for her being and continuing to be an employee at G.C.H.Q., or to use the words of Viscount Simonds [at p. 390], the payment accrued to the taxpayer by virtue of her employment... I have been driven to the conclusion that the source of the payment was the employment. It was paid because of the employment and because of the charges in the conditions of employment and for no other reason. It was referable to the employment and to nothing else. According, in my judgment, the Rs. 1,000 was a taxable emolument."

Mr. Moses, submitted, to my mind rightly, that this case demonstrates that there may be a taxable emolument even though it is in no sense remuneration for services. To that extent the passage I have quoted from Megarry J. In Pritchard v. Arundale [1972] Ch. 229, 240-241 requires to be modified. But in my judgment the decision in Hamblett v. Godfrey does not depart from the concept that an emolument must, in order to be taxable, be referable to the performance of services under the contract. The Court of Appeal recognised that the mere existence of a contract of employment, in the absence of which the payment would not have been received, is not sufficient to render the payment taxable. The payment in that case was wholly related to the future performance of the contract of employment and the terms on which such future performance was to take place. Therefore, although the payment was not remuneration, it did relate to the performance of the contract of employment, not merely to its existence.

Hamblett v. Godfrey was applied by the House of Lords in Bray v. Best [1989] 1 W.L.R. 167. The circumstance in that case were unusual After the end of the taxpayers employment with G. Ltd. he received a payment on the winding up of a fund held on trust for the benefit of employees of G. Ltd. By the time the case reached the House of Lords, it was not disputed that such payment was an emolument from the taxpayers employment with G. Ltd. The special commissioners held that, although the payment was a taxable emolument, since it had not been received until after the employment had terminated it could not be attributed to any year during which the taxpayer was an employee of G. Ltd. Accordingly there was no way in which the payment could be assessed to tax u/s 181. The Crown contended that the commissioners having found that the payment was reward for services, it necessarily followed that the payment was remuneration for the taxpayers services with G. Ltd., and accordingly could be apportioned over the whole period of such employment. The House of Lords rejected this submission. They held that, although emoluments include sums paid by way of periodic remuneration for services, that concept is not an essential ingredient of the term : see p. 176. In reaching that conclusion they relied on the decision in Hamblett v. Godfrey.

In my The Judgment Bray v. best casts little light on the present case beyond the fact that the House of Lords applied the decision in Hamblett v. Godfrey. The question whether the payment arose "from" the employment was not in issue at all. The case decides that a payment may constitute an emolument "from the employment" even if it is paid otherwise than by way of remuneration for services; it casts no light on the essential characteristic of a payment which does constitute such an emolument.

In my judgment the totality of the authorities lead to this conclusion. In order for an emolument to fall within the words of section 181 as being "from" employment, it is not essential that the payment is received by way of reward or remuneration for services past, present or future. However the receipt of such a payment by way of reward for services is the paradigm of a taxable receipt : such a case provides valuable guidance to the meaning of the statutory words. The essence of a payment which is a reward for services is that it relates to the performance of the contract by the rendering of services, not merely to the existence of the contract of employment. Hamblett v. Godfrey shows that other types of payment made by an employer to an employee may equally refer to the performance of the contract of employment. But this represents no departure from the essential characteristic reqired to make such payments an emolument essential characteristic required to make such payments an emolument "from" the employment, namely that they are referable to the performance of the services under the relevant contract of employment and nothing else. To adopt Lord Radcliffes approach in Hochstrasser v. Mayes [1960] A.C. 376, 392, the payment is assessable if it has been paid to the taxpayer for "acting as or being an employee," but not if the payment is attributable solely to the creation of the contract of employment irrespective of the services to be rendered under it. If that be right, it follows that the commissioners decision was erroneous in law. On the facts found by them, the Nottingham Forest payment could not relate to the performance of services by the taxpayer under his contract with Southampton. Nottingham Forest had no interest whatsoever in the performance, as opposed to the formation, of that contract and the payment was in no way referable to such performance. Therefore, as the judge held, the Nottingham Forest payment could not be an emolument of the taxpayers employment with Southampton.

I add two words of caution. First, as Megarry J. pointed out in Pritchard v. Arundale [1972] Ch. 229, 240-241 in the passage I have quoted, where a premium or other initial payment is made by the employer, as opposed to a third party having no interest, direct or indirect, in the performance of the contract, it may be difficult to show that such payment is not merely advance remuneration. Second, where a payment is made by a third party as an inducement to enter into the contract, the substance of the matter has to be looked at. It was not suggested by the Crown in this case that there was any arrangement between Southampton and Nottingham Forest that Nottingham Forest, rather than Southampton, should make the payment of Rs. 75,000 to the taxpayer so as to give him the benefit of tax reliefs. If such an arrangement had existed the taxpayer would have received the payment as additional remuneration indirectly from Southamption, the employer and as such it would have been taxable in just the same way as the Rs. 80,000 paid by Southampton to the taxpayer as a signing-on fee. In my judgment our decision in this case does not open the gate to the avoidance of tax by transferring the burden of the signing-on fee from the transferee club to the transferee club.

Other difficult points were argued on the appeal. What is the true meaning of the rather cryptic findings in paragraph 5(j) of the case stated (ante, p. 376H) ? What is the correct legal weight to be given to the fact that the transfer of the taxpayer involved not only his agreement to be employment by Southampton but also his agreement to terminate his employment with Nottingham Forest ? Where there are two causes for the receipt of a single sum of money, one referable to the relevant employment, the other not, how is the matter to be approached ? Since on the view I take of this case it is unnecessary to decide these matters, I express no view on them.

In my judgment therefore the decision of Morritt J. was correct and the appeal should be dismissed.

STAUGHTON L.J. I agree that this appeal should be dismissed. The statute requires us to consider whether the payment of Rs. 75,000 comes within the words "in respect of any office or employment on emoluments therefrom." It has been said on the highest authority that we must follow the words of the statute, rather than glosses on them which the courts have provided in the past. But the language is not entirely precise, as a number of cases have shown. In my opinion judges owe some duty to provide guidance for those who pay taxes - or do not pay them-for tax inspectors, and for general commissioners, if that can properly be done.

It is accepted that a payment by a third party may qualify as an emolument from an employment, as well as payments by the employer. But Morritt J. limited this to cases "where the payer has an interest direct or indirect in the performance of the contract of employment either in the past... or in the future..." Mr. Moses for the Crown submitted that there is no warrant for any such limitation. He sought to include the case where a payment is made by a third party to induce a person to enter into a contract of employment, without any concern as to whether services under that contract are ever performed. The statute would then include emoluments arising from the creation of a contract of employment, as well as emoluments from the performance of it. I do not accept that argument. The nearest case to it is Hamblett v. Godfrey [1987] 1 W.L.R. 357. But there Neill L.J. at p. 370, relying on the words of Lord Radcliffe in Hochstrasser v. Mayes [1960] A.C. 376, 391, considered that the payment was made to the taxpayer "in return for her being and continuing to be an employee." She received it "as a recognition of the fact that she had lost certain rights as an employee, and by reason of the further fact that she had elected to remain in her employment" - albeit only for a period of one month.

Hambletts case received the approval of the House of Lords in Bray v. Best [1989] 1 W.L.R. 167. There too it was held that an emolument from employment need not necessarily be a sum paid by way of periodic remuneration for services. The reasoning of Lord Oliver of Aylmerton, at pp. 176G. 177A, again followed the words of Lord Radcliffe, "in return for... being an employee." And asked whether a payment arose "from the existence of the employer-employee relationship and not... from some thing else."

In my judgment those cases show where the frontier lies. If a payment is not made for being an employee, or does not arise from the existence of the employer-employee relationship, it is not an emolument from the employment. Specifically, I would hold that a payment made to induce a person to accept an office or enter into a contract of employment is not on that ground alone an emolument from the office or employment.

One can, I think, extract that conclusion from the language of the statute itself. Employment normally means the state or condition of a person who provides services to another for reward; it may sometimes mean the appointment or engagement of a person, but that is to my mind a rarer meaning. So too "office" in the present context means an official position, rather than appointment to that position. In my judgment an emolument from the holding of an office, or from being in the state or condition of a person who provides services, is what is to be taxable, and not an emolument which flows from appointment or engagement alone.

How then does one account for the cases where a signing-on fee, or golden hello, has sometimes been held to be taxable ? The answer is that, where the payment is made by the employer, it may be equally referable both to the signing of the contract of employment and to the services which are expected to be provided under it. Therefore it may be an emolument from the employment, in the sense of that word which I have attempted to define. The distinction between appointment and employment is often of no consequence so far as a payment by the employer is concerned. The same may be true in the case of a payment by a third party, if he is interested in the services to be performed. It is only in cases such as the present, which I suppose to be unusual, where a third party is anxious for the appointment to take place but not in any way concerned with what happens thereafter, that the distinction is necessarily important. This reasoning is, I think, exactly that of Megarry J. in Pritchard v. Arundale [1972] Ch. 229, 240-241 :

"Remuneration for services is still remuneration for services, even if paid in a lump sum in advance. But whereas it will normally by very difficult to demonstrate that periodical payments made by an employer to an employee during the employment are anything but payments taxable under Schedule E, the fact that a payment is in the form of a lump sum paid at or before the commencement of the employment is a factor which, taken with other factors, may exclude Schedule E. If that Schedule is to apply. What the payment must relate to, and reward, is not the mere existence of a contract of service, nor merely entering into such a contract, but the services rendered or to be rendered under the contract." (My emphasis).

I would only suggest one slight elucidation of that passage. When Megarry J. spoke of "the mere existence of a contract of service," I think that he was referring to its creation, rather than the fact of its being in existence at any given moment. That is to be contrasted with Lord Oliver of Aylmertons speech in Bray v. Best [1989] 1 W.L.R. 167, 177A where "the existence of the employer-employee relationship" meant its state of being.

In the course of his reply Mr. Moses referred us to a passage in the judgment of Jenkins L.J. in Moorhouse v. Dooland [1955] 1 Ch. 284, 306 :

"I do not think that Mr. Buchers submission to the effect that sums paid voluntarily by third parties to the holder of an office or employment are only taxable if there is some nexus between the payer and the recipient in the shape of services rendered by the latter for the benefit of the former can be accepted. The presence of some nexus may no doubt support the conclusion that the payment in question is a profit of the office or employment, but it does not follow that the absence of any such nexus will necessarily conclude the matter the other way."

In that case the court was dealing with collections for a cricketeer from spectators on the occasion of some meritorious performance. It was not a case where the payment was made before any service had been provided at all, and without concern as to whether any would be provided. I do not think that Jenkins L.J. intended to refer to such a case.

I would uphold the decision of Morritt J. and his reasoning which I have quoted, and would dismiss this appeal.

BELDAM L.J. - I agree.

Appeal dismissed with costs. Leave to appeal on terms as to the taxpayers costs.

Solicitors : Solicitor of Inland Revenue; Geroge Davis and Co. Manchester.