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Chapter EIM13070

Document Cited in Related
Vincent
Published date22 May 2014
Record NumberEIM13070
CourtHM Revenue & Customs

The concept of damages applies to any contract, including an employment contract. Whenever one party to a contract acts contrary to its terms (that is, breaches the contract), and by doing so inflicts a loss on the other party, the latter can sue for damages. So rules that apply to calculating damages in general law also apply where an employer breaches an employment contract. Probably the most common breach in this context is where an employer fails to give proper notice of termination.

A payment of damages falls within Section 401 ITEPA 2003 (see EIM13005). Whether a payment is damages can be a difficult issue and close attention to facts is essential (see EIM12977and subsequent guidance).

When an Employment Tribunal, a Court or parties to a termination settlement calculate damages they will usually follow the “Gourley principle”. This principle is a rule of non-tax law that derives from British Transport Commission v Gourley (1955). There is an example at EIM13995.

The principle is that a person must not be placed in a better or worse position than if the contract had actually been carried out. For example, say an employer fails to give proper notice of termination to an employee, and there is no contractual provision or practice relating to payments in lieu of notice (see EIM12976onwards). A payment for the breach is one of damages (see EIM12978).

The sum of damages is first calculated by reference to the pay and benefits that the employee would have received during the notice period if proper notice had been given, for example gross pay of £2,000. Note that this is not in fact pay but is merely part of the calculation of the appropriate level of damages.

But £2,000 would place the employee in a better position than if the contract had been carried out because if the employee had received pay during notice, it would have been taxed and liable to NICs, leaving (say) £1,500 in hand. As the damages payment itself is not taxable as it is within the £30,000 threshold (see EIM13500) and not liable to NICs the employee...

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