A v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 04 February 2009 |
| Date | 04 February 2009 |
| Court | Special Commissioners (UK) |
special commissioners decision
Michael Tildesley OBE
Richard Vallat, counsel for the Appellant
John Higgins HM Inspector of Taxes assisted by David Martindale HM Inspector of Taxes for the Respondents
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 - Income Tax (Earnings and Pensions) Act 2003 section 401 subsec-or-para 1s. 401(1) ITEPA 2003
A special commissioner decided that the sum of £240,000 paid to the taxpayer to settle his claim of unfair dismissal was directly connected to the termination of his employment, and therefore counted as employment income subject to the £30,000 exemption under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 403s. 403. However, the sum of £10,000 allocated for injury to feelings did not count as employment income.
In October 2002, the taxpayer 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 taxpayer made a claim of unfair dismissal to the employment tribunal seeking compensation. In September 2003, the taxpayer's claim was settled by mediation which resulted in him receiving a payment of £250,000 from the bank together with the payment of his legal expenses.
The taxpayer contended that £50,000 of the £250,000 was caught by ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401 subsec-or-para 1s. 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 s. 401(1). HMRC contended that £240,000 of the £250,000 was caught by Income Tax (Earnings and Pensions) Act 2003 section 401 subsec-or-para 1s. 401(1). The remaining £10,000 was attributed to injury to feelings.
The taxpayer'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.
HMRC relied on the wording of the settlement agreement which stated that that bank would pay the taxpayer £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. It was not open to the taxpayer 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.
The taxpayer appealed against an amendment to his tax return for the year ending 5 April 2004 which resulted in an increase of £88,000 in tax due.
How much of the settlement payment fell within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 401 subsec-or-para 1s. 401(1) as a payment in consequence of or otherwise in connection with the termination of the taxpayer's employment.
The special commissioner (Michael Tildesley) (dismissing the appeal) said that the parties had accepted that the wording of s. 401(1), in particular "in consequence of or otherwise in connection with termination of a person's employment" was broad.
The principal weakness in the taxpayer's case was his failure to undermine the compelling evidence of the settlement agreement, which demonstrated a direct link between the compensation and the termination of the taxpayer's employment. The settlement was agreed to by the taxpayer having been advised by his solicitor. Under the terms of the agreement, the compensation of £250,000 was payable on withdrawal of his claims before the tribunal. Those claims, except that for injury to feelings, were directly related to his dismissal. The taxpayer in his claim before the tribunal clearly stated that the damage to his reputation flowed from his dismissal. That was a more plausible explanation for reputational damage than the one proffered by the taxpayer which was based on the sham nature of the disciplinary proceedings. There was no persuasive evidence of the sham nature of the proceedings. Moreover, the taxpayer conceded that he could have continued in his job on the same terms and conditions despite the final warning.
On the evidence, the taxpayer's termination of his employment gave rise to his claims for compensation before the employment tribunal. The claims except for injury to feelings were made by reason of his dismissal from employment. The payment of compensation was made to discharge those claims. Accordingly, the compensation paid except that for injury to feelings was directly connected to the termination of his employment.
Further, the facts of the case did not bring them within the most serious category of damages for injury to feelings. The circumstances relied upon by the taxpayer lacked objectivity. The taxpayer was entitled to return to his job on the same terms and conditions. The bank's conduct constituted an investigation which followed transparent procedures into a complaint that the taxpayer had not met compliance regulations. The investigation did not go beyond the terms of the complaint. In those circumstances the compensation allocated to injury to feelings should be limited to a maximum of £10,000.
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 Income Tax (Earnings and Pensions) Act 2003 section 401 subsec-or-para 1section 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. Income Tax (Earnings and Pensions) Act 2003 section 401 subsec-or-para 1Section 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...
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