Personal payments from business owners to employees

One question we are sometimes asked by business owners, particularly when they are selling a business, is whether they can make personal payments out of their own funds to employees free of tax.

The general principle is that anything paid to employees is treated as liable to income tax, whether or not it is paid by the owner personally, unless it can be shown to be for personal reasons alone. The balance is very much in favour of the payment being taxed as income, and modern Share Purchase Agreements (SPAs) on sales frequently include provisions requiring disclosure of any actual or planned payments by the sellers to employees, which the purchasers will contend should they be liable to income tax.

There have been very few tax cases dealing with this point, however the recent case of OOCL UK Branch v HMRC (judgement delivered on 24 November 2023) is relevant as it sets out the key principles.

Read the full judgment here. The key findings were that a payment is taxable as income on the employee if either it is:

• From employment (in simple terms, did the company pay it or was the payment in some way part of the employee’s remuneration for their work?), or
  
• By reason of employment (a difficult hurdle to pass due to the deeming provisions – would the employee have received the payment had they not been an employee?)

There was a lot of debate about these points between the parties, and the conclusions of the Tribunal based on the facts of the case were:

• The payments were not from employment. There is a detailed analysis of the legal principles and tests in Paragraphs 35 and 52 of the judgement, with the conclusion at 53 – the employees had already been fully paid for their work.

• The payments were therefore liable to income tax on the employees.

The case reaffirmed the principles that gifts will be taxable as income on the recipients unless there is strong evidence of the personal nature of the payment, which is made outside of the company – i.e. by an owner to a family member, close personal friend or similar, or for some personal act or event separate from the employment, even though the recipients are also employees.

Some relevant points from the judgement relating to gifts are below:

• Properly considered, it was contended [by OOCL], that the Payments were gifts both in an ordinary language sense and by reference to the examples given in HMRC’s guidance. OOCL strongly resisted HMRC’s contention that in order to be a gift there needed to be an event or justification unique to the recipient or arise from a personal relationship between the donor and the donee. OOCL contended that there only needed to be a personal reason for the donor to have made the gift and here that reason was the significant financial benefit derived from the share sale.
  

• Whilst HMRC accepted that the Email indicated that the Payments were made as a mark of appreciation it was appreciation for the services of each individual as an employee. They disputed that the Payments could be gifts on the basis that the Payments were made ubiquitously to all employees and that Mr CC Tung could not have had a personal relationship with each employee.

• In the present case it was not contested that in order to receive their respective Payment each recipient had to be an employee. We have found as a fact that the Payments were calculated by reference to length of service and salary albeit that we do not know precisely how the calculations were undertaken. The only relationship of substance or relevance between Mr CC Tung and the recipients collectively was that he was the chairman and majority shareholder of their employer. These factors are conclusive that employment was a cause of the payments being made.

• The fact that we have found that the Payments represented a mark of appreciation and were entirely funded by Mr CC Tung does not preclude a conclusion that the Payments were made by reason of employment the nature of the payment is simply an additional reason for it being made.
  
• We therefore conclude, on the evidence, that the Payments were made by reason of employment.

A Hong Kong based billionaire who paid bonuses to staff from his own funds has lost an appeal over whether the payments were subject to income tax and National Insurance.

Tung Chee-Chen paid bonuses to staff worth a total of £851,731 out of his personal funds from the sale of his majority share in shipping company Orient Overseas Container Line Limited (OOCL). Staff members were charged income tax and National Insurance contributions (NICs) on the bonuses.

Tung appealed to the First Tier Tribunal disputing the tax charges. A total of £851,731 had been paid by employees in income tax and NICs.

The tribunal was told that the majority of the bonuses came to 50% of the annual salaries of staff.

The income tax amounted to £567,680 for the tax year ending 5 April 2019, while employee and employer NICs came to £284,051.68.

There were 10,300 staff worldwide with 99 in the UK. Tung was well known for being a ‘hands on’ and generous owner and this token of generosity was not the first time he had made large gifts to staff.

The company was sold on 24 July 2018 to COSCO Shipping Holdings with staff finding out via an email sent from Tung’s corporate email account. He described the one-off payment as: ‘This special discretionary payment will be funded by the Tung family, and distributed through OOIL, as payment agent, as a bonus.’

The bonus was processed by the UK payroll team on 27 September 2018 by a third party payroll provider. This was to ease the transaction and administration of the transfers for Tung. Each bonus was clearly labelled on the payslips and was subject to NICs and income tax.

Shortly after the payments were made the OOCL finance team reviewed the tax and NICs treatment. It considered that the payments were not emoluments ‘from’ employment and were not ‘paid by reason of’ employment, and as such should not have been subject to PAYE or NICs. The issue was raised at a meeting with HMRC on 6 November 2018.

Earlier year updates were submitted between August and September 2020 for the September 2018 pay period claiming repayment of the £587,680 income tax and £284,051 NICs. In November 2021, HMRC issued a final determination confirming that the tax and NICs had been correctly deducted.

OOCL argued that the one-off payments ‘were clearly not made in respect of future services of employment’. HMRC considered the payment was from OOCL and from employment, and therefore were taxable.

The tribunal disagreed, stating: ‘The fact that the payments were funded by Mr CC Tung from the unusual event of the share sale, were voluntary, a one off, unexpected and made to recipients whose salaries were at market rate and not in a sector accustomed to payment of gratuities all compellingly justified a conclusion, on their own and together, that the payments were not income from employment.’

HMRC argued that ‘the payments were made as a consequence of the recipients being employees and having contributed to the success of the business.

‘We were invited to conclude that as the payments had, as a cause for payment, that the recipients were employees of OOCL, the payments were necessarily the subject of a charge to income tax under section 201 ITEPA with the necessary consequence that they were also subject to NICs by virtue of section 3 SSCA.’

Although the tribunal found that the payments were not income from employment, they were ‘made by reason of employment’.

The FTT concluded: ‘The fact that we have found that the payments represented a mark of appreciation and were entirely funded by Mr CC Tung does not preclude a conclusion that the payments were made by reason of employment, the nature of the payment is simply an additional reason for it being made.’

The case was dismissed.