Moorthy v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 21 August 2014 |
| Neutral Citation | [2014] UKFTT 834 (TC) |
| Date | 21 August 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 834 (TC)
Judge Anne Redston, Mrs Ruth Watts Davies
Mr David Gray-Jones, Solicitor-Advocate, of Thomas Mansfield LLP appeared for the Appellant
Mr Maurice Chapman, Officer of HM Revenue & Customs, appeared for the Respondents
Income tax - Termination of employment - Compromise agreement signed after termination and payment of £200,000 made - Appellant's case that payment made to compensate for discrimination causing injury to feelings, to protect the employer's reputation and other reasons - Whether taxable under the Income Tax (Earnings and Pensions Act) 2003 ("ITEPA 2003"), Income Tax (Earnings and Pensions) Act 2003 section 401s. 401 - Cases of Walker v Adams (HMIT)(2003) Sp C 344, Oti-Obihara[2011] TC 00819 and Orthet Ltd v Vince-Cain [2004] IRLR 857 considered - Held, payment taxable in full subject to £30,000 exemption - Available exemption reduced because of redundancy payment in previous year - Whether taxable income reduced by a further £30,000 "concession" given by HMRC - Held, no.
The appellant had claimed that a payment made by his employer was not taxable due to it being paid to settle a discrimination case. The First-tier Tribunal (FTT) decided that the appellant was subject to tax under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401 on the full amount of payment being £200,000 minus the legislated £30,000 tax free amount in cases of redundancy.
Mr Moorthy was made redundant by his employers Jacobs Engineering (UK) Ltd (Jacobs) on 12 March 2010. He claimed that the decision to make him redundant was due to age discrimination. This was contested by his employer. In 2011 the parties engaged in mediation and a settlement agreement for £200,000 was reached with the caveat that the employer did not accept that Mr Moorthy had been discriminated against.
Mr Moorthy's case was that the £200,000 was not taxable because it had been paid to settle a discrimination claim, to compensate him for not being selected for a post and/or to protect Jacobs' reputation. He submitted his self-assessment tax return on this basis. HMRC contended that the £200,000 was taxable as a termination payment under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401, other than (a) in respect of £30,000 which was specifically exempted under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 403s. 403 and (b) a further £30,000 as representing compensation for injury to feelings.
The FTT's starting point was the statute. ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401 brings into charge a payment which is "directly or indirectly in consideration or in consequence of, or otherwise in connection with" the termination of a person's employment. This is a very widely drawn provision. Not only does it catch payments made directly in consideration of a termination, or directly in consequence of a termination, but indirect payments of either type, but is then further expanded to include payments which are not even in consideration or in consequence of a termination but "otherwise in connection with" a termination.
On the basis of the evidence produced by the parties the FTT found that:
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(2) the payment of £200,000 fell within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401;
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(3) the £30,000 exemption allowed by ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 403s. 403 is reduced to £19,360 by virtue of a statutory redundancy payment of £10,640 made in the previous tax year; and
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(4) the Tribunal had no jurisdiction to allow the further relief of £30,000 deducted by HMRC.
As a result, Mr Moorthy's 2010-11 taxable income included an amount of £180,640 (£200,000 - £19,360) arising from the compensation payment made to Mr Moorthy. This was £40,617 more than the adjustment contained in HMRC's closure notice.
This case shows that the courts view ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401 widely and it is difficult to prove that payments such as Mr Moorthy's are not sufficiently linked to employment to be non-taxable. This case may appear a harsh decision for the appellant in that Mr Moorthy's tax assessment was increased to over and above the figures included in the closure notice. Mr Moorthy would have paid less tax had he not appealed to the Tribunal. However, at the beginning of the hearing the FTT alerted Mr Moorthy to this possibility. Also the FTT drew their attention to the failure of Mr Moorthy and HMRC to take into account the previous year's redundancy payment, and the consequences which that failure might have on the outcome if the appeal was lost. It would have been possible to withdraw the appeal during the hearing, but that was a matter for Mr Moorthy and his representative and the appeal was not withdrawn.
[1]Mr Moorthy was made redundant from his employment with Jacobs Engineering (UK) Limited ("Jacobs") on 12 March 2010. Mr Moorthy subsequently received a payment of £200,000 from Jacobs under a compromise agreement.
[2]Mr Moorthy's case was that the £200,000 was not taxable because it had been paid to settle a discrimination claim, to compensate him for not being selected for a post and/or to protect Jacobs' reputation.
[3]HM Revenue & Customs ("HMRC") contended that the £200,000 was taxable as a termination payment under Income Tax (Earnings and Pensions Act) 2003 ("ITEPA") Income Tax (Earnings and Pensions) Act 2003 section 401s 401, other than (a) in respect of £30,000 which was specifically exempted under ITEPA Income Tax (Earnings and Pensions) Act 2003 section 403s 403 and (b) a further £30,000 as representing compensation for injury to feelings.
[4]On 13 August 2013 HMRC issued a closure notice and amended Mr Moorthy's self-assessment return by including £140,0231 in his taxable income for the 2011-12 tax year. Mr Moorthy appealed the amendment to his SA return and his appeal was subsequently notified to the Tribunal.
[5]We found that:
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(2) the payment of £200,000 fell within ITEPA Income Tax (Earnings and Pensions) Act 2003 section 401s 401;
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(3) the £30,000 exemption allowed by ITEPA Income Tax (Earnings and Pensions) Act 2003 section 403s 403 is reduced to £19,360 by virtue of a statutory redundancy payment of £10,640 made in the previous tax year; and
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(4) the Tribunal had no jurisdiction to allow the further relief of £30,000 deducted by HMRC.
[6]As a result, Mr Moorthy's 2010-11 taxable income includes an amount of £180,640 (£200,000 - £19,360) arising from the compensation payment made to Mr Moorthy. This is £40,6172 more than the adjustment contained in HMRC's closure notice.
[7]At the end of this decision, we consider the interaction between Mr Moorthy's self-assessment ("SA") liability and Jacob's PAYE deduction obligations and find that Mr Moorthy is entitled to a tax credit of £2,128, which reduces the tax on his income.
[8]HMRC provided the Tribunal with a bundle of documents containing:
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(2) the correspondence between the parties and between the parties and the Tribunal;
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(3) two notes of telephone conversations between the parties;
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(4) Mr Moorthy's SA tax return for the 2010-11 tax year;
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(5) HMRC's closure notice dated 13 August 2013;
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(6) Mr Moorthy's Grounds of Complaint relating to his employment tribunal claim against Jacobs ("the Complaint"); his Statement of Case for mediation and the Compromise Agreement settling his claim ("the Agreement");
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(7) An internal memo dated 19 September 2012 between Mr Martin Delnon, HMRC's technical adviser in relation to termination payments and benefits, and Mr Geoff Brown of HMRC's Personal Tax Operations department; and
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(8) A short letter consisting of two paragraphs from Jacobs' tax manager to HMRC, dated 15 April 2013. Neither party referred to this letter in their submissions. We noted that it referred to Mr Moorthy's claim being settled "before the conclusion of the hearing." As there was no hearing, but rather a mediation, we found that it was not safe to place any weight or reliance on this letter.
[9]Mr Moorthy provided a witness statement and was cross-examined by Mr Chapman. He also answered questions from the Tribunal. We found him to be a transparently honest witness. We accepted his witness statement as evidence of fact, except for the parts beginning "in my view" or "I believe" which are self-evidently matters of opinion.
[10]Mr O'Connor, the HMRC Review Officer who conducted the statutory review following Mr Moorthy's appeal against the closure notice, also provided a witness statement. We were told he was unable to attend to give oral evidence. His witness statement summarises the chronology of what happened, and sets out his view of the issue in dispute. To the extent that it does the latter, it goes beyond the scope of a witness statement. To the extent that it introduced the documents and summarised the chronology, it was not in dispute and we accepted it.
[11]On the basis of the evidence set out above, we make the following findings of fact.
[12]Mr Moorthy was born in 1952. He began his employment with Kent County Council in 1988. In January 1999 his employment transferred to Babtie Group Ltd and in August 2004 that company was purchased by Jacob's parent company. In March 2008 Mr Moorthy's employment transferred to Jacobs.
[13]By 2007 Mr Moorthy had risen to be Executive Director of Operations. This was an important and responsible job within the organisation. He was a member of the company's Local Government Services Executive Management Team ("EMT").
[14]Mr Moorthy was paid £111,000 a year, plus pension rights. Depending on the performance of the business, he also received a discretionary annual bonus in the form of shares, which tended to be worth between £15,000 and £20,000.
[15]Every year Jacobs held an...
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