In this important test case on the definition of "retirement", by a majority of 4 to 1 the House of Lords yesterday allowed an appeal by Mr Venables against the Court of Appeal's decision in favour of the Inland Revenue.

Mr Venables, an executive director of Ven Holdings Ltd, took early retirement on 30 June 1994, and was subsequently taxed on three payments to him from the company pension scheme, totalling over £0.5m. After 30 June 1994 Mr Venables was an unpaid non-executive director, spending most of his time in the USA.

Mr Venables lost his appeal to a special commissioner against this tax bill, but then won in the High Court. The judgment was overturned by the Court of Appeal, which concluded that "retirement" meant cessation of service as an employee of the employer in question, which included service as a director. For a director there was no cessation of service so long as the individual continued to hold that office.

The Revenue's view, maintained all the way to the Lords, was that Mr Venables wasn't entitled to any early retirement benefits because he had never been an employee of the sponsoring employer; so he couldn't have retired from service as an employee, and he certainly hadn't retired as a director. It argued that the absence of any written contract of employment with this small family company outweighed the facts that Mr Venables had worked for the company for many years and latterly carried out the functions of a managing director, and had been paid for doing so. The House of Lords dismissed this argument as "far-fetched".

The Lords decided that the word "retire" means "retire from the service of the company whether as employee or director", and that it was not necessary that a member who is both an employee and a director should retire from both positions. Mr Venables therefore retired from pensionable service as an employee on 30 June 1994, even though he continued to be an unpaid non-executive director thereafter.

In reaching this conclusion "with some satisfaction", Lord Millett noted that the Court of Appeal's ruling would mean that had Mr Venables retired on 30 June 1994 as a director as well as an employee, but then been reappointed as a director on 1 July, he could have had his pension scheme benefits; but as he had not managed this contrivance, he couldn't.