Wilson (HM Inspector of Taxes) v Clayton

JurisdictionEngland & Wales
JudgeLord Justice Peter Gibson,Lord Justice Clarke,Lady Justice Arden
Judgment Date07 December 2004
Neutral Citation[2004] EWCA Civ 1657
Docket NumberCH2003APP0697
CourtCourt of Appeal (Civil Division)
Date07 December 2004

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Patten J.

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice Peter Gibson

Lord Justice Clarke and

Lady Justice Arden

CH2003APP0697

Case No: C3/2004/1048

Between
Ian Wilson (H.M. Inspector of Taxes)
Appellant
and
Stephen Clayton
Respondent

Mr. Adam Tolley (instructed by The Solicitor of Inland Revenue) for the Appellant

Mr. Richard Jones Q.C. and Mr. Glenn Willetts (instructed by Messrs Thompsons of Nottingham) for the Respondent

Lord Justice Peter Gibson
1

This appeal by the Crown relates to the correct treatment for tax purposes of a sum of £5,060 which the Respondent, Stephen Clayton, received from his employer, Birmingham City Council ("the Council"), pursuant to a consent order dated 12 July 2000 and made by an Employment Tribunal ("ET") sitting in Birmingham.

The facts

2

Mr. Clayton prior to 1997 was one of a number of employees of the Council who under their contracts of employment were entitled to receive a benefit known as an Essential Car User Allowance ("ECUA"). This is a payment made to the employee for having to use his car at work in the normal execution of his duties.

3

In 1997 the Council, wishing to make savings in its budget, reviewed ECUA which it decided to scrap for employees doing less than 3,000 miles a year. Toward the end of 1997 the Council wrote to employees affected by the decision, asking for formal agreement to the removal of ECUA. Mr. Clayton was one such employee. The employees were warned that if such agreement was not forthcoming, their employment contracts would be terminated and new contracts offered which would be identical to their old contracts save that they would only receive ECUA if they drove more than 3,000 miles a year.

4

Mr. Clayton did not give his agreement. Accordingly, his contract of employment was terminated, but he was immediately re-employed on the new terms and conditions which left him no longer entitled to ECUA. 126 employees of the Council including Mr. Clayton commenced proceedings in the ET against the Council for unfair dismissal. Further, two trade unions, UNISON and UCATT, brought proceedings against the Council for breach of its duty under s. 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 to consult representatives of the employees amongst whom the employer is proposing to make large-scale redundancies.

5

The cases of two employees were selected as test cases and heard by the ET. The unions' applications were also heard at the same time. On 3 March 2000 the ET held that the employees had been unfairly dismissed. It also held that the Council did breach its duty under s. 188. The decision of the ET was expressed in terms strongly critical of the Council. A remedies hearing was then fixed for all the employees who had brought proceedings and for the two unions. However, agreement was reached between the parties without a contested hearing and its terms embodied in the order made by the ET on 12 July 2000.

6

Para. 1 of the order was in this form:

" Reinstatement

1. It is ordered by consent that [a] the [Council] will reinstate pursuant to S114 Employment Rights Act 1996 all the Applicants …. within 28 days with their right to ECUA restored.

[b] the [Council] will calculate and pay to "the Applicants" Basic Awards pursuant to S119 Employment Rights Act 1996 within 28 days.

[c] the [Council] will calculate and pay to "the Applicants" pursuant to S114(2)(a) …. remuneration lost in respect of ECUA between their dates of termination and dates of reinstatement."

Para. 3 gave liberty to any of the employees of the Council to apply to the ET for exact adjudication of any of their claims under s. 114 or s. 119 if not agreed. Para. 2 contained a consent order for the Council to pay to UNISON £1,125,000 on its s. 188 claim. No reference was made to UCATT's s. 188 claim.

7

Mr. Clayton submitted to the Inspector of Taxes a self-assessment for the fiscal year ended 5 April 2001. It appears that the £5,060 payment was made in that year but was not treated by Mr. Clayton as taxable, because the Inspector of Taxes amended the self-assessment to include that payment.

8

Mr. Clayton appealed to the General Commissioners against that amendment. In the Case Stated requested by the Crown after the appeal was allowed they made no findings of fact as to how the parties to the order of 12 July 2000 came to give their consent. They merely recorded the result of the liability hearing, the fact of the consent order at the remedy hearing, the fact that Mr. Clayton was reinstated and his right to ECUA restored and the fact of the payment of £5,060 pursuant to para. 1(b) of the Order. The primary focus of the Crown's case at the hearing before the General Commissioners was on the chargeability of the payment as an emolument within s. 19 of the Income and Corporation Taxes Act 1988 (" ICTA"). In the alternative the Crown claimed that the payment was chargeable under s. 154 of the ICTA as a benefit provided to Mr. Clayton at the cost of his employer. We are told that there was no investigation before the General Commissioners of the circumstances of the making of the consent order or of the consideration moving from Mr. Clayton for the payment of £5,060.

9

The General Commissioners allowed the appeal. They expressed their decision briefly in para. 9 of the Case Stated in this way:

"(a) [Mr. Clayton's] employment had been terminated and the payment awarded by the Employment Tribunal to [Mr. Clayton] on 12 July 2000 was received in connection with that termination under section 119 [Employment Rights Act] 1996.

(b) Although the payment fell within the provisions of section 148 ICTA 1988 as a payment not otherwise chargeable to tax received in connection with the termination of a person's employment, it was not chargeable to tax under that section as it did not exceed £30,000.

(c) Accordingly, [Mr. Clayton's] appeal against the Revenue amendment to his self-assessment is allowed and we confirm his self-assessment in the amount initially made."

10

The Crown appealed to the High Court. The appeal was heard by Patten J. It was argued for the Crown that the payment could not be and therefore was not a payment of compensation for unfair dismissal because the ET had no jurisdiction to make such an order in addition to an order for reinstatement, and the order for reinstatement had the effect of requiring the taxpayer to be treated throughout as if he had not been dismissed; the payment was therefore referable to his employment and was taxable either under s. 19 or s. 154. The judge rejected both alternatives, holding that the payment fell within s. 148 ICTA as not otherwise chargeable to tax and as received in connection with the termination of Mr. Clayton's employment and in consequence of that termination. As the payment did not exceed £30,000, the result was that the £5,060 payment was not chargeable to tax under s. 148. Accordingly, the judge dismissed the appeal.

11

The Crown applied to this court for permission for this second appeal and such permission was granted by Carnwath L.J. on the papers.

Statutory provisions

12

At this point it is convenient to refer to the statutory provisions in the Employment Rights Act 1996 (" ERA") and in ICTA respectively which are relevant to this appeal.

Employment Rights Act 1996

13

Part X of ERA gives an employee the right not to be unfairly dismissed (s. 94(1)), the right to bring a complaint of a breach of that right before an ET (s. 111) and the right, if that complaint is upheld, to the remedies provided for in Ch. II of Part X. By s. 111(2) and (3) the successful complainant is given the right to ask for an order for reinstatement or re-engagement under s. 113 and, if so, the ET may make such order. But by s. 112(4), "If no order is made under section 113, the tribunal shall make an award of compensation for unfair dismissal (calculated in accordance with sections 118 to 127A) to be paid by the employer to the employee."

14

S. 114 provides for the order for reinstatement in the following terms (so far as material):

"(1) An order for reinstatement is an order that the employer shall treat the complainant in all respects as if he had not been dismissed.

(2) On making an order for reinstatement the tribunal shall specify -

(a) any amount payable by the employer in respect of any benefit which the complainant might reasonably be expected to have had but for the dismissal (including arrears of pay) for the period between the date of termination of employment and the date of reinstatement,

(b) any rights and privileges (including seniority and pension rights) which must be restored to the employee, and

(c) the date by which the order must be complied with."

15

When an order is made under s. 113 but the complainant is not reinstated or re-engaged in accordance with the order, the ET must award compensation (s. 117(3)).

16

The compensation which is provided for by s. 112(4) is in two parts: the basic award and the compensatory award (s. 118(1)). The basic award is calculated in accordance with the mandatory provisions of s. 119 by reference to the period of employment ending with the effective date of termination. The compensatory award is of such amount as the ET considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal insofar as that loss is attributable to action taken by the employer (s. 123 (1)). It is unnecessary to refer to the further provisions governing the...

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