Article by David Royall, a freelance writer on tax and legal issues.
Published in October 2001 issue of Tax Adviser.
One of the bigger news stories to emerge from the start of the soccer season was Manchester United star Ryan Giggs’ ‘tax-free’ receipt of £1m from a benefit match. ‘Tax-free’? Quite how the football correspondents presumed to know that the Inland Revenue would refrain from demanding tax on the receipt is unclear. Had they perhaps been whiling away the tedium of the close season by studying the House of Lords decision in Reed v Seymour
(1927) 11 TC 625?
The issue in that case was whether the gate money received by professional cricketer James Seymour from a benefit match was a taxable profit or perquisite arising from his employment falling within what can nowadays be called the basic Sch. E charge under ICTA 1988, s. 19. In the High Court Rowlatt J (the doyen of Revenue judges) saw the question as whether the ‘very large sum’ received constituted a (non-taxable) ‘personal gift’ or (taxable) ‘remuneration’ (despite neither expression featuring in the applicable legislation), and he upheld the general commissioners’ conclusion that the receipt was not taxable. His decision was overturned by a majority of the Court of Appeal but was restored by a majority of the House of Lords among whom Lord Dunedin characterised the receipt as Seymour’s ‘little nest egg’. (The ‘little nest egg’, incidentally, proved sufficient for the purchase of a farm for Seymour.) Lord Phillimore went as far as saying:
‘My Lords, I do not feel compelled by any of [the cited] authorities to hold that an employer cannot make a solitary gift to his employee without rendering the gift liable to taxation under Schedule E. Nor do I think it matters that the gift is made during the period of service and not after its termination, or that it is made in respect of good, faithful and valuable service.’
The Seymour case has often been considered, but seldom if ever applied, in subsequent tax litigation. Indeed, some judges may have had misgivings about the decision. For example, in a Court of Appeal case (Wright v Boyce (HMIT) (1958) 38 TC 160, which concerned cash Christmas presents to a professional hunt servant from persons (with whom he had been in contact in that capacity), Jenkins LJ (who gave the only substantive judgment) declared that:
‘It must, I think, be remembered that Reed v Seymour was a case turning very much on its particular facts, and it was, as I see it, a vital element in the case that the benefit match was held and the gate money was collected on the eve of the retirement of Seymour after a long and brilliant career as a county cricketer playing cricket for the county of Kent. It was a ‘once and for all’ payment after very long service and after a long career spent in entertaining the public. It was made at the proper time for making a testimonial, that is to say, on the eve of the retirement of the person to whom it was being given. That was not so in the present case . . . … ’
And it does not seem to be so in Ryan Giggs’ case either: in September he was captaining the Welsh football team. If Giggs had been about to retire (otherwise than because of injury) and Reed v Seymour were considered to apply to his £1m, then all bar £30,000 might well be taxable under the terminal payments provisions of ICTA 1988, s. 148.
Jenkins LJ’s reference to Seymour as ‘turning on its own facts’ should not be treated as a statement of the obvious (judges always preface these with ‘of course’). Rather, it is a coded way of communicating a less than wholehearted enthusiasm for what was a decision of court higher than his own.
Footballers’ benefit cases
In Davis v Harrison (1927) 11 TC 707, Everton FC, on transferring a professional player to another club (Preston North End), gave him a sum as ‘accrued benefit’ in accordance with his agreement with Everton. Rowlatt J (again) held the payment to be assessable under Sch. E. The judge explained:
‘Now in this case there is a very large element of business in this matter, and I think it is totally different from the cricketer's case.’
Indeed, it has long been settled that receipts from footballers’ benefit matches are taxable under the basic Sch. E charge, notwithstanding the lack of any formal agreement between the club and the player for the payment of any sum, at least if it is understood by the players in the club that they are likely to get a benefit if the conditions in the Football League regulations are satisfied (Corbett v Duff (1941) 23 TC 763).
The applicable principles
In Moorhouse v Dooland (1954) 36 TC 1 a professional cricketer was employed under a contract which provided for collections from spectators for meritorious performances. The Court of Appeal held that the collections were profits arising from the cricketer’s employment and not mere personal presents. Jenkins LJ (again) reviewed the earlier cases and then said:
‘From these citations I deduce the following principles:–(i) The test of liability to tax on a voluntary payment made to the holder of an office or employment is whether, from the standpoint of the person who receives it, it accrues to him by virtue of his office or employment, or in other words, by way of remuneration for his services. (ii) If the recipient's contract of employment entitles him to receive the voluntary payment, whatever it may amount to, that is a ground, and I should say a strong ground, for holding that from the standpoint of the recipient it does accrue to him by virtue of his employment, or in other words by way of remuneration for his services. (iii) The fact that the voluntary payment is of a periodic or recurrent character affords a further, but I should say a less cogent, ground for the same conclusion. (iv) On the other hand, a voluntary payment may be made in circumstances which show that it is given by way of present or testimonial on grounds personal to the recipient, as for example a collection made for the particular individual who is at the time vicar of a given parish because he is in straitened circumstances, or a benefit held for a professional cricketer in recognition of his long and successful career in first-class cricket. In such cases the proper conclusion is likely to be that the voluntary payment is not a profit accruing to the recipient by virtue of his office or employment but a gift to him as an individual paid and received by reason of his personal needs in the former example and by reason of his personal qualities or attainments in the latter example.’
The statutory test
The problem, then, lies in deciding whether the disputed receipt constitutes ‘emoluments from’ the sportsman’s employment, and the most authoritative guidance as to the meaning of those words is found in Lord Radcliffe’s speech in Hochstrasser v Mayes (1959) 38 TC 673 (at p. 707):
‘ … is not easy in any of these cases in which the holder of an office or employment receives a benefit which he would not have received but for his holding of that office or employment to say precisely why one considers that the money paid in one instance is, and in another instance is not, a ‘perquisite or profit … therefrom’. The test to be applied is the same for all. It is contained in the statutory requirement that the payment, if it is to be the subject of assessment, must arise ‘from’ the office or employment … [W]hile 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.’
Lord Phillimore’s view, cited above, must therefore be treated with great caution.
Benefit in kind?
If Ryan Giggs’ £1m receipt falls outside the basic Sch. E charging provision, is it nevertheless caught by the provisions of ICTA 1988, s. 154? Despite the cross-heading ‘Benefits in kind’ to ICTA 1988, s. 154, benefits in cash can fall within the section’s ambit if provided by reason of the taxpayer’s employment (Wicks v Firth (1982) 56 TC 338, House of Lords). The statutory words ‘by reason of … employment’ do not mean the disputed benefit has to be made or provided by, or at the cost of, the employer. However, the words have a wider meaning than ‘from the employment’ found in the basic Sch. E charge. In Wicks v Firth, Lord Denning MR in the Court of Appeal said that the words were designed to close the gap in taxability resulting from Hochstrasser v Mayes (above) and covered cases where an employee would not have received the benefit unless he had been an employee. The employment, he continued, had only to be one of the causes of the benefit being provided. It need not be the sole cause or even the main one. But it must be an operative cause in the sense that it was a condition of the benefit being granted.
In their Manual (SE7425), the Revenue say:
‘Where there is no entitlement to the benefit …. and no custom exists in respect of it … then the proceeds are not within Section 19 ICTA 1988. This will usually be the case where the match is organised by a ‘testimonial committee’ independent of the club. However, non-liability should not be agreed simply because such a committee exists: the full facts must be established and the principles outlined above applied.’
No reference is made to the possible application of s. 154 in this context. But even where the match is organised by an independent committee, there still seems to be scope for the section to catch the resultant benefit.
‘Tax-free’? It all depends on the facts of course …
020 7235 9381
October 2001 by