A
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 May 2015 |
| Date | 05 May 2015 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Swami Raghavan, Sandi O'Neill
Michael Firth, counsel appeared for the Appellant
Maurice Chapman, HMRC Officer, appeared for the Respondents
Income tax – Employment income – Whether payment made pursuant to a compromise agreement by employer to its employee taxable as “earnings” under the Income (Tax Earnings and Pensions) Act 2003 (“ITEPA 2003”), s. 62 – No – Payment non-taxable as it was made in respect of potential race discrimination claim – Appeal against HMRC's amendment to appellant's self-assessment allowed in principle.
Careless inaccuracy penalty – Taxable redundancy amounts not included on return – Appeal dismissed.
The First-tier Tribunal (FTT) found that a £600,000 payment received by the appellant from the bank he worked for before he left it was compensation in respect of the appellant's threatened rate discrimination claim and was not chargeable to tax on earnings from employment as payment for shortfalls in salary and bonus.
The appellant worked as a trader for a European bank in London. His service agreement provided for a basic salary of £120,000 and stated that he was also eligible for the bank's bonus scheme. In 2004 the appellant received a bonus which he regarded as small compared to the profit he had generated but the bank told him that this was due to him recently joining the bank and that from then on he would be rewarded with higher bonuses if he performed equally as well. In 2005 he was rewarded a bonus that again he regarded as low for the profits he had generated and he believed others at the same grade had received substantially higher bonuses. He complained and was told that the bank would make up for the low bonus for 2005 and that for 2006 he would receive a bonus of 10% of the profits he made for the bank. However, in February 2007 the appellant was rewarded a bonus of €125,000 having made a profit of €3.6m in calendar year 2006. The appellant believed that other staff had received salary increases and that he had received less favourable treatment in salary and bonuses as a result of discrimination due to his ethnic origin.
In 2008 the bank informed the appellant he was being made redundant and offered him £1,650 in statutory redundancy and an ex-gratia payment of £48,898. The appellant served a discrimination questionnaire under Race Relations Act 1976, s. 65 (now the Equality Act 2010) setting out a summary of why he maintained he had been treated unlawfully and specified the name of a less experienced English trader who had joined the bank later but who had been retained as an employee. The bank later offered the appellant an additional lump sum of €700,000 converted to £600,000 if he signed a Compromise Agreement.
The appellant contended that the bank made the £600,000 payment in settlement for a claim for race discrimination and the sum represented compensation for the appellant's unfair treatment in receiving low or no bonuses over several years and no salary increases. Referring to the House of Lords decision in Deeny v Gooda Walker Ltd (in voluntary liquidation) TAX[1996] BTC 144, the appellant argued that such damages related to an employment pre-termination and were not taxable under ITEPA 2003, s. 62.
HMRC disputed that on the facts of the case race discrimination was the reason why the bank made the payment but in any case referred to Walker v Adams (HMIT) SCD(2003) Sp C 344 and Oti-Obihara TAX[2011] TC 00819, where damages calculated by reference to earnings were treated as taxable and argued that where damages were awarded by reference to earnings (whether pre- or post- termination of employment) then the amount relating to earnings was taxable under ITEPA 2003, s. 62 or s. 401 (HMRC agreed the payment did not fall within the latter).
The FTT held that none of the decisions they were referred to dealt in an authoritative or even persuasive way with whether compensation in respect of underpaid salary and bonus due to discrimination was subject to tax under s. 62. The FTT held that it was not necessary for the appellant to show there was discrimination but he had to produce sufficient evidence to show that the reason why the payment was made was to compensate for an actual or potential action for discrimination. The FTT found that the payment was made to compensate for such action as the bank did not wish to defend a discrimination claim against it even though the bank did not admit liability or state that discrimination was a reason for the payment. The serving of the discrimination questionnaire was instrumental in the bank putting in place the Compromise Agreement and in offering to pay the additional £600,000. The FTT therefore concluded that the payment was not earnings under s. 62 and allowed the appellant's appeal. The appeal against HMRC's amendment to his self-assessment for 2008–09 was allowed in principle. If the parties failed to agree the amount they may revert to the Tribunal.
The FTT however dismissed the appellant's appeal against a FA 2007, Sch. 24 careless inaccuracy penalty for failing to include the redundancy elements of the payments of £48,898 and £1,650 on his return for 2008–09 despite having received advice that these sums were taxable under ITEPA 2003, s. 401 (subject to an exemption for £30,000).
The FTT had only to decide on the narrow issue of whether the settlement payment had to be taxed as earnings within ITEPA 2003, s. 62. It did not have to “step into the shoes of an employment tribunal” and consider whether it was satisfied there would have been a successful claim at the tribunal. It was however satisfied that the reason the payment was made by the bank (rightly or wrongly on their part) was to settle a discrimination claim and not to pay back money which they thought the appellant was entitled to under contractual agreement. Having reached that conclusion the payment did not fall within s. 62 to be taxed as earnings.
[1] The appellant worked as a trader for a European bank (“the Bank”) in London for a number of years. The primary issue in this appeal concerns the tax treatment of a £600,000 payment he received from the Bank before leaving it and whether the payment is chargeable to tax on earnings from employment because it was designed to make good shortfalls in salary and bonus, as HMRC argue or, whether the sum was compensation in respect of the appellant's threatened race discrimination claim, as the appellant argues.
[2] HMRC amended the appellant's 2008–9 tax return to reflect their view that the payment was taxable as earnings but the appellant also argues that even if the sum was earnings then HMRC should, consistent with their view that payment was for past bonuses, have assessed for those earlier years and that the amendment for 2008–9 was incorrect.
[3] The appellant also appeals against a Schedule 24 Finance Act 2007 careless inaccuracy penalty in the amount of £739.72 for failing to include the redundancy element of the payments he received on his 2008–9 tax return. He argues that he is not liable as he took reasonable care in completing the form.
[4] The appellant made an application for the decision to be anonymised, to which HMRC did not object. This was on the basis that the Tribunal would need to consider various issues relating to the conduct of the appellant's employer which was alleged to be racially discriminatory in considering the appellant's case but that it would be unfair for the employer to be exposed in this way when it did not have an opportunity to answer those allegations. The appellant referred us to (Redundant Employee v McNally (HMIT) SCD(2004) Sp C 440) where it was directed by the Special Commissioner that the hearing should be in private on similar grounds. While we were invited by the appellant to anonymise the decision under rule 32 of the Tribunal's Rules, we noted the non-disclosure provision set out at rule 32(6) of these Rules only arises where a hearing has been held wholly or partly in private. Although as it turned out, no-one apart from the parties and their representatives and HMRC's witness was present at the hearing it was a hearing which was held in public and so the decision cannot be anonymised pursuant to rule 32. We noted however that it would be possible to anonymise this decision using the Tribunal's general case management power in rule 5 of the Tribunal's Rules. For the reasons related to fairness which the appellant mentioned we were satisfied that the decision should not disclose information which would enable the identification of the appellant's employer. We queried with the appellant what the basis was for extending the anonymisation to the appellant given the reason underlying the request was protection of the identity of the employer. We accepted the appellant's argument that in order to preserve the employer's anonymity details relating to the appellant's name and nationality ought also to be anonymised as otherwise it would be possible for anyone employed in the specialised sector which the appellant worked in to deduce the identity of the employer.
[5] In setting out the factual background it is necessary to refer to a number of different employees of the Bank. It is helpful to state at the outset the roles of the relevant individuals and the abbreviations by which we refer to them:
1) The appellant– Managing Director within Emerging Market's (“EM”) Group
2) B– member of the Bank's Executive Committee and in charge of EM Group.
3) C– Deputy in charge of EM Group.
4) Chairman– the chairman of the Bank's board.
5) D– Executive board member and head of EM Group who took over from C in 2006.
6) E– the Managing Director who initially dealt with the appellant's official grievance.
7) F– Senior Director of Human Resources who as well as being in post at the time of the Bank's settlement discussions with the appellant was the...
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