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.’