Oti-Obihara v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 November 2010 |
| Neutral Citation | [2010] UKFTT 568 (TC) |
| Date | 15 November 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
[2010] UKFTT 568 (TC)
Edward Sadler (Tribunal Judge) (Chairman)
Hennessy Thompson of Thompson & Co, accountants, for the Appellant
Nicola Parslow of the office of the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Income tax - payment received in connection with the termination of a person's employment - claims by employee of racial discrimination and harassment eventually resulting in termination of the employment - settlement payment by employer - amount of payment attributable to termination of the employment rather than to compensation for non-pecuniary loss for infringement of UK and US anti-discrimination and similar rights - Income Tax (Earnings and Pensions) Act 2003, Income Tax (Earnings and Pensions) Act 2003 section 401s. 401 - appeal allowed in part
1. This is an appeal by Mr Chidi Anthony Oti-Obihara ("the Appellant") against an amendment by The Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") by way of closure notice of the Appellant's self-assessment tax return for the tax year ended 5 April 2006.
2. In summary the issue between the parties is as follows. The Appellant was employed by a US investment bank in London. In the course of his employment the Appellant claimed that he was subject to racial discrimination and harassment, and, after internal grievance procedures had been applied, eventually instituted proceedings against his employer before the employment tribunal. Before the matter came to a hearing at the employment tribunal the Appellant negotiated a settlement with his employer, whereby his employment was terminated, he waived all legal claims he might have against his employer, and he received a settlement sum of £500,000, which his employer paid after deducting income tax of £103,400. The Appellant did not include the payment of £500,000 in his self-assessment tax return on the grounds that it was not income from his employment nor a payment received in connection with the termination of his employment.
3. The closure notice issued by the Commissioners on 15 September 2009 amended the Appellant's self-assessment tax return to the following effect: £28,000 of the payment of £500,000 was treated as damages for injured feelings and therefore not taxable; the balance was treated as a payment received in connection with the termination of the Appellant's employment, and therefore subject to income tax (except for the first £30,000, which was free of tax). The closure notice requires the Appellant to pay a further £72,192.54 of income tax (that is, in addition to the tax withheld by the employer), giving the Appellant a total income tax liability of £175,592.54 in relation to the settlement payment of £500,000 he received.
4. In his appeal, the Appellant argues that of the settlement payment, only £18,206.40 is a payment in connection with the termination of his employment (this sum is arrived at by reference to the amount of his annual salary and his contractual notice period), with the balance representing a payment of damages for racial discrimination and harassment, which is not liable to income tax. He argues that since the amount of the employment termination payment is less than £30,000 it is free of tax, so that he is entitled to recover all the tax withheld by the employer, and the closure notice should be amended to the effect that no further tax is payable.
5. I have to decide how much of the settlement payment is properly regarded as a payment in connection with the termination of the Appellant's employment (and therefore chargeable to income tax, subject to the £30,000 exemption).
6. It is my decision that the sum of £165,000 is properly regarded as a payment in connection with the termination of the Appellant's employment, and that accordingly the sum of £135,000 is chargeable to income tax. The Appellant's self-assessment return should be amended accordingly with, if the figures so require, recovery by the Appellant of any excess tax withheld by his employer.
7. The legislation which applies to this appeal is shortly stated, and is found in the Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003").
8. Income Tax (Earnings and Pensions) Act 2003 section 6 subsec-or-para 1Section 6(1) ITEPA 2003 provides, "The charge to tax on employment income … is a charge to tax on (a) general earnings …". For these purposes both "employment income" and "general earnings" mean "earnings within Chapter 1 of Part 3".
9. Section 62 ITEPA 2003 provides:
(1) This section explains what is meant by "earnings" in the employment income Parts [that is, including Chapter 1 of Part 3].
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(2) In those Parts "earnings", in relation to an employment, means-
(a) any salary, wages or fee,
(b) any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money's worth, or
(c) anything else that constitutes an emolument of the employment.
10. Since payments made on the termination of a person's employment are not salary or other emoluments of the employment, they are brought within the income tax charge by special provision. Section 401 ITEPA 2003 provides (so far as relevant to this appeal):
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(1) This Chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with-
(a) the termination of a person's employment … by the person …
11. The charge to income tax in the case of such a termination payment is provided in Income Tax (Earnings and Pensions) Act 2003 section 403section 403 ITEPA 2003, which also provides exemption from tax for the first £30,000 of such a payment:
(1) The amount of a payment or benefit to which this Chapter applies counts as employment income of the employee or former employee for the relevant tax year if and to the extent that it exceeds the £30,000 threshold.
There are detailed rules to determine the £30,000 threshold, for example where there are termination payments from associated employers, but none of those rules are applicable in this appeal.
12. Finally, it is necessary to make brief reference to regulation 37 of the Income Tax (Pay As You Earn) Regulations 2003: this provision requires that where a former employer makes a payment to a former employee in respect of the former employment and that payment is made after the employment has ceased, then the former employer must deduct tax at the basic rate when making the payment.
13. In evidence before me was an agreed bundle of documents comprising the closure notice and self assessment return in dispute; correspondence between the Appellant and the Commissioners; and documents relating to the Appellant's employment, his complaints to his employers as to racial discrimination and harassment, the grievance process undertaken by his employers, his applications to the employment tribunal, the compromise agreement between the Appellant and his employers under which the payment of £500,000 was made, and various emails from his employers relating to that agreement. The Appellant prepared a witness statement, and at the hearing gave further evidence, including in cross-examination by Miss Parslow on behalf of the Commissioners.
14. The following are my findings as to the facts in this case:
(2) The Appellant is of West African origin.
(3) On 9 February 2004 the Appellant began employment in London with Morgan Stanley International Inc. ("Morgan Stanley") as a second year associate in their Fixed Income Division, a position which required him to work on the trading floor at Morgan Stanley.
(4) Morgan Stanley is a US investment bank with its headquarters in New York and a substantial operation in London.
(5) The terms of the Appellant's employment entitled him to a base annual salary (fixed at £60,000 as at February 2004), a one-off "sign-on payment" of the sterling equivalent of $20,000 should he remain employed for a period of one year, and the right to be considered for an annual discretionary bonus quantified by reference to his performance and conduct and also the profitability of Morgan Stanley, such bonus to be paid provided the Appellant remained employed at the end of Morgan Stanley's fiscal year.
(6) For the year ended 5 April 2005 the Appellant received gross remuneration of £88,039.26, which included a year-end bonus of approximately £20,000.
(7) The Appellant was entitled to no more than three months' notice by Morgan Stanley to terminate his contract of employment.
(8) The Appellant ceased to be employed by Morgan Stanley on 26 August 2005. At that time his base annual salary was £72,816. He received no discretionary bonus for the year in which he ceased to be employed.
(9) In June 2004 a new manager was appointed to the business in which the Appellant worked. The Appellant asked this manager to introduce him to a wider range of colleagues on the trading floor, and at a meeting for that purpose the manager introduced the Appellant to those colleagues as their "new slave". The Appellant was the only African working on the trading floor.
(10) The Appellant felt degraded and humiliated by this incident. He reported it immediately to the human resources department at Morgan Stanley, and the matter was taken up...
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