Krishna Moorthy v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Asplin LJ,Underhill LJ,Lord Justice Henderson |
| Judgment Date | 20 April 2018 |
| Neutral Citation | [2018] EWCA Civ 847 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2016/1369 |
| Date | 20 April 2018 |
[2018] EWCA Civ 847
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Underhill
Lord Justice Henderson
and
Lady Justice Asplin
Case No: A3/2016/1369
Ms Claire Darwin and Mr Aidan Wills (instructed by Thomas Mansfield Solicitors Ltd) for the Appellant
Mr Akash Nawbatt QC and Mr Christopher Stone (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date: 6 February 2018
Judgment Approved
Introduction
Following a mediation in January 2011, the appellant taxpayer, Mr Moorthy, agreed to compromise a claim for unfair dismissal and unlawful age discrimination which he had brought in the employment tribunal against his former employer, Jacobs Engineering (UK) Ltd (“Jacobs”). The agreed terms were embodied in a deed of compromise (“the Compromise Agreement”) under which Mr Moorthy agreed to accept payment of “an ex gratia sum of £200,000 by way of compensation for loss of office and employment”, without any admission of liability by Jacobs, in “full and final settlement” of his existing claims and any other claims (broadly defined) arising out of or connected with his employment or its termination, whether or not such claims fell within the jurisdiction of an employment tribunal. Mr Moorthy was then paid the settlement sum in two instalments in the 2010/11 tax year.
The main issues which arise on this appeal are:
a) whether the settlement sum was in principle subject to income tax as employment income of Mr Moorthy under Chapter 3 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”), which treats as earnings, and thus as taxable employment income, “payments and other benefits which are received [ by the relevant person] directly or indirectly in consideration or in consequence of, or otherwise in connection with – (the termination of a person's employment”; and, if so,
b) whether the settlement sum (or any part of it) was taken out of charge to tax by the exemption in section 406 of ITEPA 2003, which states that Chapter 3 does not apply to a payment or other benefit provided “on account of injury to… an employee”, the alleged injury being the injury to Mr Moorthy's feelings sustained in the context of his age discrimination claim.
I will refer to these two issues as “the taxability issue” and “the exemption issue” respectively.
The taxability issue has so far been determined against Mr Moorthy, and in favour of the respondents, the Commissioners for Her Majesty's Revenue and Customs (“HMRC”), first by the Tax Chamber of the First-tier Tribunal (Judge Redston and Mrs Watts Davies) (“the FTT”) in a decision released on 21 August 2014 (“the FTT Decision”, [2014] UKFTT 834 (TC), [2015] IRLR 4), and then on appeal by the Tax and Chancery Chamber of the Upper Tribunal (Rose J, President, and Judge Sinfield) in a decision released on 14 January 2016 (“the UT Decision”, [2016] UKUT 0013 TCC, [2016] IRLR 258).
The exemption issue was conceded by Mr Moorthy before the FTT. The solicitor advocate then appearing for him, Mr David Gray-Jones of Thomas Mansfield LLP, expressly accepted that it was no part of his client's case that the payment fell within the exemption in section 406 of ITEPA 2003 as being for injury or disability: see the FTT Decision at [57]. Before the Upper Tribunal, however, Mr Gray-Jones sought (and was granted) permission to withdraw this concession. As the Upper Tribunal explained, at [22] of the UT Decision:
“Whether a payment in compensation for injury to feelings can fall within s.406 ITEPA is an important question on which different courts and tribunals have reached different conclusions. The Equality and Human Rights Commission (“EHRC”) has intervened in this appeal and lodged written submissions on the issue. As the matter has not been considered by the Upper Tribunal previously and because Mr Moorthy, HMRC and the EHRC had provided detailed written submissions on the point, we decided that this case provided an opportunity for the Upper Tribunal to give some guidance on the meaning of “injury” in s. 406. This will reduce the risk of inconsistent results by different panels of the FTT in future cases. For that reason, we decided that, although reliance on s. 406 had been disclaimed below and no permission to appeal on that ground had been given, we would allow Mr Gray-Jones to withdraw the concession recorded by the FTT that s. 406 was not in point and argue the issue before us.”
Having heard argument on the exemption issue, the Upper Tribunal held that “injury” in section 406 “refers to a medical condition and does not include injury to feelings”: see the UT Decision at [63]. Since there was no evidence that the age discrimination of which Mr Moorthy complained had caused him any recognisable physical or psychiatric injury, as opposed to injury to his feelings, the Upper Tribunal dismissed his appeal on this ground. In so doing, they declined to follow two earlier decisions of the Employment Appeal Tribunal (“the EAT”) in the cases of Orthet Ltd v Vince-Caine [2005] ICR 374 (“ Orthet”) and Timothy James Consulting Ltd v Wilton [2015] ICR 764 (“ Timothy James”).
Apart from the taxability and exemption issues, there are two further subsidiary issues. The first is whether HMRC were right to concede in the closure notice which they issued to Mr Moorthy, and again at the hearing before the FTT, that £30,000 of the settlement amount should be treated as compensation for age discrimination and (as such) within the exemption in section 406. It is now common ground that the answer to this question depends on the correct answer to the exemption issue, and adds nothing to it. Mr Moorthy no longer argues that HMRC should be held to their concession, which was only made in the first place in order to try to reach agreement, if the correct position in law is that the £30,000 was taxable. In particular, it is not alleged that Mr Moorthy had a legitimate expectation that £30,000 of the compensation payment would not be subject to tax in his hands, regardless of the true legal position.
The second subsidiary issue concerns an alleged inconsistency with section 124(6) of the Equality Act 2010 (which requires the amount of compensation which may be awarded by the employment tribunal to correspond to the amount which could be awarded by the County Court under section 119 of that Act) if awards of compensation made by the employment tribunal have to be “grossed up” to take account of the income tax payable under Chapter 3 of Part 3 of ITEPA 2003, whereas compensation awards for other forms of discrimination are not subject to income tax and are therefore paid as a net sum without deduction of tax. As I shall explain in due course, this ground of appeal is in my view misconceived and can be rapidly disposed of.
In this Court, each side has been represented by counsel who did not appear below. Ms Claire Darwin, leading Mr Aidan Wills, appears for Mr Moorthy, while HMRC are represented by Mr Akash Nawbatt QC, leading Mr Christopher Stone. In addition, we have the benefit of the helpful written submissions of Henrietta Hill QC on behalf of the EHRC which were submitted to the Upper Tribunal, and upon which the EHRC continues to rely. The EHRC has not, however, sought to intervene any further in this Court, taking the view that its written submissions fully set out its position.
Permission to appeal on all grounds was granted by the Upper Tribunal, in a decision notice issued on 4 March 2016. In granting permission, the Upper Tribunal accepted “that there is an important principle involved in this case namely the tax treatment of payments made in respect of discrimination and in particular whether compensation paid for injury to feelings is taxable.” The Upper Tribunal also observed that they had arrived at a conclusion different from that of the EAT in Timothy James, and that there were conflicting decisions in the FTT.
Facts
The facts as found by the FTT are set out in the FTT Decision at [12] to [35]. Mr Moorthy provided a witness statement, and was cross-examined by the officer then appearing for HMRC. The FTT found him to be “a transparently honest witness”. The summary of the facts which follows is drawn from the FTT's findings, and also from the helpful summary provided by the Upper Tribunal in the UT Decision at [11].
Mr Moorthy was born in 1952. After beginning work with Kent County Council in 1988, he moved to the private sector in 1999, and in 2008 his employment was transferred to Jacobs following a takeover.
By 2007 Mr Moorthy had risen to be executive director of operations at Jacobs. This was an important and responsible post, which carried with it membership of the company's local government services executive management team (“EMT”). He was paid a salary of £111,000 a year, plus pension rights and a discretionary annual bonus in the form of shares depending on the performance of the business.
On 4 February 2009, all members of the EMT were called to a meeting at which they were told that there was to be a restructuring and there would be fewer senior jobs. The EMT members would have to apply for the remaining posts, and those who were not successful might be made redundant.
This was a shock to Mr Moorthy, who also told the FTT (and they found as a fact) that before this meeting he had not experienced any discrimination while working at Jacobs.
Mr Moorthy was unfortunately not successful in obtaining one of the new posts, and on 12 March 2009 he was told that he would be dismissed by reason of redundancy. He...
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