Goldman
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 April 2012 |
| Neutral Citation | [2012] UKFTT 313 (TC) |
| Date | 24 April 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 313 (TC)
Judge John Walters QC, Lynneth Salisbury
The Appellant appeared in person
Mrs Christine Cowan, HMRC, appeared for the Respondents
Income tax - Payment in consequence of the termination of contract of employment - Whether within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 part 6 chapter 3Pt. 6, Ch. 3 and subject to exemption from tax for the first £30,000 under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 403s. 403, or "earnings" within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 62s. 62 - Contractual provision in the contract of employment for payment in lieu of notice - Whether payment made pursuant to that provision or alternatively for settling disputes arising in relation to its application - Held the source of the payment was the contractual provision in the contract of employment for payment in lieu of notice and the payment was therefore "earnings" within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 62s. 62 - Appeal dismissed
The First-tier Tribunal decided that the amount paid to the taxpayer by his employer in settlement of his claims arising from his termination from employment without notice was deemed earnings under the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003"), Income Tax (Earnings and Pensions) Act 2003 section 62s. 62. The amount was paid to the taxpayer pursuant to a provision in his employment agreement, and not as damages for the employer's breaches of the agreement. The amount did not relate to the economic consequences of such breaches and had its source in the taxpayer's contractual entitlement under the employment agreement.
The taxpayer appealed against HMRC's amendment of his self-assessment tax return for the year ended 5 April 2008. The amendment included as income chargeable to income tax the whole £123,750 paid to the taxpayer on the termination of his employment with a company ("SVL").
The taxpayer was the chief operating officer of SVL beginning 20 November 2006 with, gross basic salary of £165,000 per annum. His employment agreement ("the agreement") with SVL, particularly clause 21.3, provided payment of certain amounts in lieu of notice within 14 calendar days of the termination date. Such termination would be for any reason other than performance or conduct-related issues.
Difficulties arose in the working relationship between the taxpayer and the chief executive officer ("the CEO"). On 26 June 2007, the CEO informed him that she was terminating his employment. No written notice was given to him. However, 14 calendar days from 26 June 2007 had elapsed and no payment had been made to the taxpayer. After several exchanges of correspondence between the taxpayer and SVL, they entered into a compromise agreement settling the taxpayer's claim. In that agreement, the taxpayer accepted less than his entitlement under clause 21.3. SVL deducted income tax from the whole sum of £123,750 which was paid in three equal instalments. The taxpayer objected to the deduction in respect of the first £30,000 on the basis that it was not required by law. In his self-assessment tax return, he reclaimed the income tax deducted on payment of the first £30,000.
The taxpayer argued that the £123,750 was not paid under clause 21.3, but was paid to settle his claims for his wrongful dismissal due to non-performance related issues. He said that SVL breached the agreement in not making payment within 14 calendar days and in not paying the full amount due. He submitted that the payment made under the compromise agreement was damages for SVL's breaches of the agreement and was made to avoid litigation, rather than to settle a debt or to settle his claim to be entitled to reasonable notice of the termination of the agreement.
HMRC submitted that the amount of £123,750 was not paid as damages outside the employment agreement, but was made as settlement of a dispute over the application of clause 21.3. The aim of the compromise agreement was to secure partial implementation of the agreement.
Whether the £123,750 was paid to the taxpayer pursuant to clause 21.3 of the employment agreement or as damages for SVL's breaches of agreement.
Held, dismissing the taxpayer's appeal:
Payment in lieu of notice made in pursuance of a contractual provision, agreed at the outset of the employment, which enables the employer to terminate the employment on making that payment, is properly to be regarded as an emolument from that employment (EMI Group Electronics Ltd v Coldicott (HMIT)TAX[1999] BTC 294, considered). Such payment falls squarely within one as being paid to an employee in return for acting as or being an employee and as being an emolument from being or becoming an employee (Hochstrasser (HMIT) v MayesTAX(1959) 38 TC 673, Shilton v Wilmshurst (HMIT)TAX[1991] BTC 66, considered).
Here, the Tribunal ruled that SVL's payment of £123,750, in lieu of notices in all respects in accordance with his contractual entitlement under clause 21.3 of the agreement, was undoubtedly emolument or earnings within the general definition of earnings under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 62s. 62. The payment was not in any realistic sense damages for SVL's breach of the agreement as the sum did not relate in any way to the economic consequences of such breaches. The payment undoubtedly had its source in the taxpayer's contractual entitlement under clause 21.3.
If the taxpayer's argument were correct, it would be open to anyone entitled to a contractual payment in lieu of notice to accept less, in settlement of his claim to enforce the contractual entitlement, and thus achieve exemption from tax under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 403s. 403 in respect of the first £30,000. This would not be a sensible result consistent with a purposive interpretation of the legislation.
1.The appellant, Mr Brian Goldman ("Mr Goldman") appeals against an amendment of his self-assessment tax return for the year ended 5 April 2008. The amendment was to include as income chargeable to income tax the whole of the payment of £123,750 made to Mr Goldman on the termination of his employment with SpinVox Limited ("SpinVox"). Mr Goldman's return had been completed on the basis that £93,750 of this sum was chargeable to income tax, but that the remaining £30,000 was not chargeable to income tax as being the...
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