Moorthy v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 January 2016 |
| Neutral Citation | [2016] UKUT 13 (TCC) |
| Date | 14 January 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
The Hon Mrs Justice Rose DBE, Chamber President, Judge Greg Sinfield
David Gray-Jones, solicitor advocate, of Thomas Mansfield Solicitors Limited appeared for Mr Moorthy
John Brinsmead-Stockham, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax – Termination of employment – Payment of £200,000 made under compromise agreement signed after termination – Whether payment within Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”), Pt. 6, Ch. 3 and chargeable to income tax – Whether payment received in connection with termination of employment within ITEPA 2003, s. 401 – Yes – Whether damages for injury to feelings payment on account of injury to employee within ITEPA 2003, s. 406 – No – Whether Appellant can rely on “concession” by HMRC to reduce amount chargeable to income tax – No – Appeal dismissed.
The Upper Tribunal (UT) dismissed Mr Moorthy's appeal against the decision of the First-tier Tribunal (FTT) in Moorthy TAX[2014] TC 03952 finding that the FTT was correct to determine that a £200,000 ex-gratia payment made under a compromise agreement was taxable under the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”), s. 401, subject to the £30,000 exemption allowed by ITEPA 2003, s. 403 (as reduced by a £10,640 statutory redundancy payment received in the previous tax year), and that ITEPA 2003, s. 406 did not relieve any part of the payment because the term “injury” in s. 406 related to medical conditions that led to the termination of employment (or change in duties or level of earnings) and did not include injury to feelings. The FTT was also correct in disregarding and disallowing the further relief of £30,000 offered by HMRC as a concession as it has no statutory basis.
Mr Moorthy was made redundant by his employer Jacobs Engineering (UK) Limited (Jacobs) and received statutory redundancy pay of £10,640 together with an ex-gratia sum of £200,000 compensation for loss of office and employment under a compromise agreement in settlement of proceedings brought by Mr Moorthy in the Employment Tribunal for unfair dismissal and age discrimination. Mr Moorthy completed his tax return on the basis that the settlement amount was tax free and HMRC issued a closure notice amending his return on the basis that the payment was a taxable termination payment under ITEPA 2003, s. 401 other than (a) in respect of £30,000 which was specifically exempted under ITEPA 2003, s. 403 and (b) a further £30,000 as representing compensation for injury to feelings.
Mr Moorthy had appealed to the FTT who had found that:
1) the payment of £200,000 fell within ITEPA 2003, s. 401;
2) the £30,000 exemption allowed by ITEPA 2003, s. 403 was reduced to £19,360 by virtue of the statutory redundancy payment of £10,640 made in the previous tax year; and
3) the Tribunal had no jurisdiction to allow the further relief of £30,000 deducted by HMRC.
Mr Moorthy appealed to the UT.
The UT noted that the effect of ITEPA 2003, s. 403 was that any payment which fell within ITEPA 2003, s. 401 and exceeded the £30,000 threshold, was treated as employment income and charged to income tax and that in calculating the £30,000 threshold, all payments within ITEPA 2003, Pt. 6, Ch. 3 in respect of the same employment were to be aggregated (ITEPA 2003, s. 404) even if they were received in different tax years. ITEPA 2003, s. 406, however, provided an exception for death or disability payments and benefits “on account of injury to, or disability of, an employee”.
The UT further noted that whether a payment in compensation for injury to feelings could fall within ITEPA 2003, s. 406 was a question on which different courts and tribunals had reached different conclusions but which had not previously been considered by the UT. As the Equality and Human Rights Commission (EHRC) had intervened in this appeal and provided detailed written submissions, the case, therefore, provided an opportunity for the UT to give some guidance on the meaning of “injury” in ITEPA 2003, s. 406.
The UT found firstly, that the language of ITEPA 2003, s. 401 was clear and its scope was wide. The section and thus ITEPA 2003, Pt. 6, Ch. 3, applied to payments and other benefits received directly or indirectly in consideration or in consequence of, or otherwise in connection with the termination of a person's employment. There was nothing in ITEPA 2003, s. 401 which excluded non-pecuniary awards, such as damages for injury to feelings, from the scope of the section and the FTT in Oti-Obihara TAX[2011] TC 00819 was wrong on this point and should not be followed. Even damages to reflect non-pecuniary matters fell within ITEPA 2003, s. 401 if they were connected with the termination of employment (or other events within s. 401(1)(b) and (c)). Accordingly, the FTT was correct to disregard the possible reasons for the payment, such as the desire to settle Mr Moorthy's claim for unfair dismissal and injury to feelings or protect Jacobs' reputation, as irrelevant. The settlement payment fell within ITEPA 2003, s. 401 and under ITEPA 2003, s. 403 counted as employment income subject to the £30,000 threshold and to the application of ITEPA 2003, s. 406.
The UT found secondly, that the purpose of ITEPA 2003, s. 406 was to take payments to an employee on account of injury outside of ITEPA 2003, Pt. 6, Ch. 3, where they would otherwise, by virtue of ITEPA 2003, s. 401, fall within that Chapter as payments in connection with the termination of a person's employment. However, it was not a general exemption from tax for payments on account of injury to an employee. The UT considered that the term “injury” fell to be considered and interpreted together with “death” and “disability” and had to be something that led to the termination of employment or to a change in duties or level of earnings. Following Horner v Hasted (HMIT) TAX[1995] BTC 343, it referred to a medical condition and did not include injury to feelings and Orthet Ltd v Vince-Cain UNK(2004) IRLR 857 and Timothy James Consulting Ltd v Wilton ICR[2015] ICR 764 were wrongly decided in so far as they had held that “injury” in s. 406 included injury to feelings.
Finally, regarding the issue of HMRC's further £30,000 concession, the UT noted that the closure notice stated that the offer to treat the further £30,000 as not taxable was a concession made in order to try to reach agreement. Mr Moorthy had not accepted the offer and as agreement was not reached, the condition on which the offer was made was not met and HMRC's offer fell away. It followed that the concession was not rightly made on a correct view of the law and the FTT were right to disregard it and Mr Moorthy could not have had a legitimate expectation that the FTT would not apply the law as they interpreted it.
The appeal was dismissed.
Mr Moorthy had received a £200,000 ex-gratia payment in settlement of proceedings before an employment tribunal which he argued was not taxable due to it being paid to settle a discrimination case. The FTT, however, found that the payment was a taxable termination payment under ITEPA 2003, s. 401, subject to the £30,000 exemption. The UT has confirmed the FTT's findings in this respect and further found in respect of an issue not argued before the FTT, that ITEPA 2003, s. 406 did not exempt any part of the payment because the term “injury” in s. 406 was to be interpreted as a medical condition that resulted in the termination of employment or a change in duties or level of earnings and it did not include injury to feelings. Finally, although HMRC had offered a further £30,000 relief as a concession to reach agreement in the course of earlier negotiations, the UT found that the FTT had been correct to disregard this as it was not rightly made on a correct view of the law and had no statutory basis.
[1] This appeal concerns the extent to which a payment made by an employer to settle a claim for unfair dismissal and age discrimination made by an employee following the termination of his employment by reason of redundancy falls to be treated as employment income by sections 401 and 403 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and is thus chargeable to income tax under section 6 of that Act.
[2] In March 2010, the Appellant (“Mr Moorthy”) was made redundant by his employer, Jacobs Engineering (UK) Limited (“Jacobs”). He received statutory redundancy pay of £10,640 in the 2009–10 tax year from which no tax was deducted. Mr Moorthy subsequently brought proceedings in the Employment Tribunal claiming unfair dismissal and age discrimination. Following mediation, Mr Moorthy and Jacobs entered into an agreement (“the compromise agreement”) under which Jacobs agreed to pay Mr Moorthy “an ex gratia sum of £200,000 by way of compensation for loss of office and employment” (“the settlement amount”). Mr Moorthy was paid the settlement amount by Jacobs in two tranches in the 2010–11 tax year. Jacobs treated £30,000 of the settlement amount as exempt from tax by virtue of section 403 ITEPA and deducted income tax at the basic rate from the balance. Mr Moorthy completed his self-assessment tax return for 2010–11 on the basis that the settlement amount was tax free. The Respondents (“HMRC”) did not agree and, in August 2013, issued a closure notice amending Mr Moorthy's self-assessment return for 2010–111 to include an additional £140,023 as taxable income.
[3] Mr Moorthy appealed against the amendment to his return and his appeal subsequently came before the First-tier Tribunal (“the FTT”). In a decision released on 21 August 2014 under neutral citation [2014] TC 03952 (“the Decision”), the FTT (Judge Redston and Mrs Watts Davies) found that:
1) the settlement amount of £200,000 fell within section 401 ITEPA;
2) taking...
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