'A' v Her Majesty's Revenue & Customs, SPC 00734

ANONYMISED DECISION WITH THE AGREEMENT OF THE PARTIES

INCOME TAX: Compensation payable under agreement to settle a dispute of unfair dismissal before Employment Tribunal – Dispute concerned the proportion of compensation that could be regarded as employment income – Appellant argued that the majority of the compensation was for damage to reputation unconnected with the termination of his employment – satisfied that the compensation was received directly in connection with the termination except £10,000 for injury to feelings – Appeal dismissed – s 401(1) ITEPA 2003

“A” Appellant

- and -

SPECIAL COMMISSIONER: MICHAEL TILDESLEY OBE

Sitting in public in London on 10 & 11 November 2008

Richard Vallat, counsel for the Appellant

John Higgins HM Inspector of Taxes assisted by David Martindale HM Inspector of Taxes for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appeal

1. The Appellant was appealing against an amendment to his tax return for the year ending 5 April 2004 dated 24 August 2007. The amendment resulted in an increase of £88,000 in tax due.

2. On 9 October 2002 the Appellant resigned from his job as Head of Department with a Bank on being told that he would receive a written warning. On 8 January 2003 the Appellant made a claim of unfair dismissal to the Employment Tribunal seeking the remedy of compensation. On 3 September 2003 the Appellant’s claim was settled by mediation which resulted in the Appellant receiving a payment of £250,000 from the bank together with the payment of his legal expenses.

3. The principal issue in dispute was how much of the settlement payment fell within section 401(1) of Income Tax (Earnings and Pensions) Act 2003 (hereinafter ITEPA 2003) as a payment in consequence of or otherwise in connection with the termination of the Appellant’s employment.

4. The Appellant contended that £50,000 of the £250,000 was caught by section 401(1). The balance was split between £175,000 for loss of reputation and £25,000 for injury to feelings. Thus the taxable element was £50,000 subject to the exemption of £30,000 given by section 401(1) ITEPA 2003.

5. The Respondents contended that £240,000 of the £250,000 was caught by section 401(1). The remaining £10,000 was attributed to injury to feelings.

6. The Appellant’s main argument was that his reputation was irreparably damaged by sham disciplinary proceedings and the written warning that ensued. His resignation did not of itself cause the damage to his reputation, and the damage was not therefore connected with the termination of his employment. His claim before the Employment Tribunal included an element for damage to his reputation.

7. The Respondents, on the other hand, relied on the wording of the settlement agreement which stated that the Bank would pay the Appellant £250,000 upon withdrawal of his claims before the Employment Tribunal. The claims were said to be by reason of his dismissal except a claim for injury to his feelings. Thus it was not open to the Appellant to redraft the terms of an agreement made in good faith. He was bound by his statement that the compensation claimed arose from the termination of his employment.

8. The subsidiary dispute concerned the amount to be allocated to injury to feelings. The Appellant referred to the decision of the Court of Appeal in Vento v Chief Constable of West Yorkshire Police [2002] EWCA Civ 1871 which issued guidance to Employment Tribunals on the level of damages for injury to feelings. The Court of Appeal identified three bands of damages. The top band should normally be between £15,000 and £25,000 and reserved for the most serious cases, such as a lengthy campaign of discriminatory harassment on the ground of sex or race. The middle band of between £5,000 and £15,000 should be used for serious cases which did not merit an award in the highest band. Awards of between £500 and £5,000 are appropriate for less serious cases, such as where the complained act was an isolated or one off occurrence.

9. The Appellant conceded that the behaviour complained of was a single occurrence but the nature of his employer’s conduct involving sham allegations intended to intimidate him was so serious as to bring it within the top band of damages. In the Respondents’ view, the compensation allocated to injury to feelings should be limited to a maximum of £10,000. The Respondents relied on the facts that there was no evidence of a lengthy campaign of intimidation by the employer, and that the Appellant could have continued in his job on the same terms and conditions despite the final warning.

10. Section 401(1) ITEPA 2003 provides that so far as is relevant:

“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 –

1. the termination of a person’s employment”.

1. Section 403(1) ITEPA 2003 states that

“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”.

12. I heard evidence from the Appellant and JB for the Appellant. JB was the Appellant’s solicitor who acted for the Appellant in respect of his claim against the Bank. JB declared that he had the Appellant’s permission to divulge information where it was necessary for the purposes of providing a coherent record of events. JB made it clear that the waiver of privilege did not go further than the matters referred to in his evidence and did not constitute a general waiver of privilege. A bundle of documents was received in evidence.

13. The Appellant began employment in the financial sector in London in 1986 starting as a blue button He progressed through various positions with different banks culminating in his appointment as European Head of Department on 15 May 2000 with the Bank at its London Branch, commencing employment on 21 August 2000. His basic salary was £115,000 gross per annum. The Appellant was eligible to participate in the Bank’s discretionary bonus scheme. TheBank, however, confirmed in the Appellant’s letter of appointment that he would receive a minimum bonus award of $1,833,510 gross in respect of the 2000 performance year.

14. The Appellant’s brief when he joined the Bank was to set up, staff and run a department trading in European convertibles. In or about October 2000 his mandate was widened to become global...