L v Revenue and Customs (INCOME TAX - relevant amount of settlement payment received from previous employer which is assessable to income tax)

HMRC defended the decision that the payment was taxable under section 62 ITEA and invited the Tribunal to determine "whether the payment arise from "the employer-employee relationship", from "being or becoming and employee" or from something else". Reliant on K+N it was submitted that where there were both employment and non-employment reasons for payments the amount would be taxable if the employment reason was a "substantial cause". The substitution principle said to be derived from Haughey was also said to apply. The fact that the payment was calculated by reference to duties of employment actually performed was accepted not to be determinative but contended to be a strong indicator that the payment was from employment. The terms of the settlement offer letter were said to clearly envisage that the payment was made in respect of the duties performed and represented payment of the sums Mr Pettigrew had been entitled to receive when those duties were performed albeit not paid at the right time, in consequence of discrimination. HMRC contended that Mr A had been wrongly decided.

The Tribunal found on the facts that the MoJ had settled Mr Pettigrew's claim so as to meet the obligations on it as confirmed in Miller i.e., he had suffered detriment to the extent that he had been under paid for the work carried out as a consequence of discrimination as a part time (fee paid) worker.

When evaluating whether the payment fell to be taxed under section 62 ITEPA the Tribunal set out the following principles derived from the case law to which the Tribunal had been referred:

Mr Pettigrew relied heavily on Mr A to support his position in the appeal. When considering the Mr A judgment the Tribunal determined (at paragraph 95) that it did not assist in determining the appeal. This was said to be on the basis that the decision in Mr A (1) was not supported by authority, (2) did not consider K+N or Mairs and (3) in a textbook on industrial relations and employment law it had been noted that the decision may have been fact sensitive.

This payment relates to sums that the Appellant was awarded by way of deferred consideration and under the incentive scheme as recorded in the statement dated 17 January 2012. The payments were due to vest in accordance with the scheme pursuant to which they were awarded and in recognition of the Appellant's services as an employee in the year to 31 December 2011. The normal consequence of redundancy would have been for the deferred entitlement to payment of the award to have lapsed, but it was within the sole discretion of the employer under the "various plan rules" to allow the sums awarded to vest despite a termination event.

We consider that it is readily apparent that the Appellant had earned the entitlement to receive the sums of deferred consideration and had a contractual entitlement to receive them. In consequence of the discretion exercised by the employer that contractual right was undisturbed. Despite the payment being made post-employment, and consistently with the analysis in Mairs we consider the payments to be deferred payments of emoluments taxable under section 62 ITEPA.

We do not consider that the employer's stipulation that the Appellant enter a settlement agreement in order that the normal consequences of termination be avoided is capable of changing the nature of the payment. Again, consistent with Mairs , we consider that any contingency arising from a requirement that settlement be reached in order that the discretion be exercised cannot alter the nature of the payment as deferred compensation - the payments were and remained for the Appellant's past service and are therefore "from employment".

Even were we wrong such that settlement of the claim was a reason we do not consider that it removes the "from employment" reason and, at most, represents an additional reason for the payment. In those circumstances, and in accordance with K+N, we would be required to consider whether the "from employment" reason was sufficiently substantive to require taxation under section 62 ITEPA. For the same reasons as identified in paragraph 77 above we consider that it was, and therefore the whole sum is properly taxed in accordance with section 62 ITEPA.

Our conclusion in this regard is also consistent with the concession made by the Appellant in respect of the payment made to remediate the employer's failure to pay the Appellant and the relevant comparators respecting the equality requirements of section 66 EqA.

Accordingly, and in respect of that part of the payment the Appellant was wrong to treat it as a payment taxed under section 401 ITEPA and should have included the whole sum and not only that above the £30,000 threshold as taxable.

The Appellant accepts that the sums paid in consequence of section 66 EqA are taxable under section 62 ITEPA as they represent the Appellant's contractual right to have been paid for the services provided by them under their contract of employment, properly and lawfully construed.

On the basis that we have concluded that the whole of the amount the Appellant treated as taxable within their self-assessment return, related to payment of deferred compensation we find that the whole of the sum attributed to their equal pay claim should be taxed as earned income under section 62 ITEPA and the Appellant's self-assessment was understated by this £(G+H )x1.5.

The parties are agreed that this amount was paid in connection with the termination of the Appellant's employment. For the reasons stated above we consider this sum to be in addition to the £O+P+Q deferred consideration and £G+H paid by way of equal pay. This sum is assessable to the extent that it exceeds the £30,000 threshold in accordance with sections 401 and 403 ITEPA. The effect of HMRC's amendment following review reflects this position.

Our task, as clearly explained in the case law, is to determine the nature of the payment and whether, by its nature there is a payment made for the services rendered by the Appellant in the performance of their duties in whole or in substantive part. If it was it will be taxable under section 62 ITEPA.

In our view the conclusion and reasoning in Gourley does not assist the Appellant's case though neither does it prejudice it. Gourley confirms that where an award of damages is not subject to taxation in the hands of the plaintiff the appropriate measure of loss of earnings (actual and/or prospective) will be the sum calculated net of tax.

In the present case however, that does not take us much further. We have carefully considered the section of Lord Reid's judgment quoted in paragraph 41 above. In our view, the quoted section must be read in context. Lord Reid was analysing the question of the remoteness of taxation when quantifying loss. Viewing the position between an employer and employee permitted an alternative perspective when considering the question of a plaintiff employee's loss. In particular, whether the employer should benefit from having to pay a lower sum by way of damages than would have been paid had the employee continued in service and, to use the phrase adopted by Earl Jowitt, thereby whether the wrongdoer employer should benefit from its wrongdoing. We consider that all that can be derived from Lord Reid's comment is that there is no benefit to the employer from the wrongdoing because, having done wrong it will be paying someone else to perform the services that would have been performed by the plaintiff and it is making the plaintiff whole for the loss suffered from wrongdoing by way of a breach of contract or having caused personal injury.

As regards Mairs we readily accept that it establishes that a payment made to satisfy a contingent right will derive its character from the nature of the payment it replaces. But we also consider that assistance is derived from the analysis of a nature of a redundancy payment. A redundancy payment is not taxable under section 62 ITEPA because it is not a payment "from employment", it is not a reward for past, present or future, services provided by the employee to the employer under their contract for services. As noted in Mairs it is a payment made to reflect that the employment has been terminated and no services will therefore continue to be provided. It is therefore contingent on the absence of employment. Of course, redundancy payments are taxed under section 401 ITEPA but that is not relevant to the analysis of why it is not taxable under section 62 ITEPA.

We consider that the analysis in Mairs informs the correct/current interpretation of Hamblett to which we were not specifically taken but which justifies one of the principles identified in Pettigrew . Hamblett concerned a payment made to Ms Hamblett following a change in her conditions of employment. At the commencement of her employment at GCHQ she had been permitted and encouraged to join a staff association or trade union. Subsequently, following a policy change, membership of such associations was precluded; each affected employee received a payment upon accepting the change of terms of employment provided that they remained with the employer. Refusal to accept the change (or request a redeployment) resulted in dismissal. The relevant charging provision was contained in section 181(1) Income and Corporation Taxes Act 1970 ( ICTA70 ) which taxed emoluments from an office or employment. The question for the court was whether the payment was "from employment".

The Court notes that Hochstrasser confirmed: it is not sufficient to render a payment assessable that an employee would not receive it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee". The Court considered that the payment to Ms Hamblett related to a loss of rights under employment protection legislation and thereby directly connected to the fact of her employment. A contrast is drawn between a payment made by an employer for restricting rights unconnected to the employment (i.e. joining a golf club) which could not be said to be from employment.

We understand the conclusion of the court in Hamblett , certainly interpreted in the light of Mairs , to provide that a payment made to compensate the removal of rights derived from the alteration of the terms on which future services will be provided by the employee to the employer will be a payment from employment, in effect it is an inducement to continue working on changed and less attractive terms. We therefore consider that the single summary of the principle derived from Hamblett in Pettigrew to be overly simplistic. Whilst a contingent payment made in substitution for a payment should follow the character of the underlying payment the critical issue then becomes the nature of the underlying payment.

As indicated above the Appellant contends that their case is essentially on all fours with Mr A and that we should apply the reasoning adopted in that case. HMRC contend that Mr A is wrongly decided and assert this is confirmed in Pettigrew, a later case of competent jurisdiction.

We note that whilst the Tribunal in Pettigrew expressed reservations about the analysis and conclusion in Mr A it stopped short of concluding it was wrong simply that it provided no assistance in determining Mr Pettigrew's case. It is our view that, on the facts, and by reference to the analysis of the binding authorities, there is a material but subtle factual difference between the cases which is more than capable of justifying the different conclusions reached on the facts (as recognised in Harvey on Industrial Relations and Employment Law ).

Mr Pettigrew's claim was made in respect of sums by reference to which he was underpaid under the terms of his contract for services properly construed within the terms of the relevant equalities legislation as confirmed in Miller . By virtue of section 39(2) and section 66 EqA (or the equivalent legislation over the term of his employment) the terms on which Mr Pettigrew was employed were modified so as not to be less favourable as a consequence of being a part time worker. In our view, Mr Pettigrew's claim reflected the Appellant's claim to breach of unequal pay (addressed in paragraphs 83 - 84 above).

By contrast Mr A's claim was not found to be an equal pay claim (by reference to which comparators would need to be established and proven); the payment was to settle a more general complaint that, as a consequence of race discrimination, he had been unfairly treated under the terms of the bonus scheme and when considering salary increases, there being no specific contractual right to be paid salary increases or bonuses all of which are discretionary. Whilst we accept that there is no reference to Mairs or K+N we do not consider either case would have resulted in a different conclusion. Judge Raghavan had determined that the nature of the payment which might have been awarded by the Employment Tribunal on Mr A's claim would not have been taxable under section 62 ITEPA as it would not have been a reward for the services actually performed. This was despite the basis of quantification of the claim. This conclusion was confirmed after a thorough consideration of the facts as evidenced, predominantly in the documents, concerning the negotiations between the parties and the terms of the settlement itself. On the evidence therefore the Tribunal did not identify any "from employment" reason for the settlement payment (only discrimination and other potential peripheral efficiency reasons/inferences) with the consequence that K+N would have had no application in any event. Accordingly, the contingent payment by way of settlement was in substitution of a claim outside the scope of section 62 ITEPA.

In our view the correct approach to be adopted when determining whether a payment made to settle a discrimination is taxable is as follows:

We therefore turn to apply that approach to the facts of this case.

By its closure notice HMRC have accepted that there was not a single global payment made by the employer even as regards the balance of the payment over and above the deferred cash compensation and incentive scheme as they have accepted £R as attributable to injury to feelings and £I as attributable to termination of employment (and taxable under section 401 ITEPA).

We have found as a fact that the balance was paid to settle the Appellant's claim that they suffered discrimination following the appointment of a second executive director to the team facing the same market thereby bifurcating of the Appellant's role, resulting in lost opportunity to develop business and unfair allocation of revenues together causing financial loss. We consider that to be exclusively a reason other than "from employment" because, the heart of this part of the Appellant's claim is not that they were not fairly paid for what work they did but that they were deprived of the opportunity to perform their full role. Consistent with the analysis and description of the nature of a redundancy payment in Mairs compensation for such lost opportunity cannot be directly connected to the employment as it was an employment she never fulfilled because of the discrimination she experienced.

We are comforted in reaching this conclusion having considered the IDS Employment Law Handbooks, Volume 5 - Discrimination at Work, Chapter 25 - Discrimination during employment, and paragraphs 25.40 - 25.41 concerning promotion. Those paragraphs indicate that the opportunity for promotion as envisaged in section 39(2)(b) EqA covers a wider range of situations than simple promotion or non-promotion including ensuring the experience and guidance necessary to achieve promotion. The text references to an unreported case: Dinar v Burger King Ltd ET Case No.15555/95 D. Mr Dinar complained that he was given more menial tasks than his white colleagues. The Tribunal found that the system of allocation of such tasks which were in the absolute discretion of the manager had been abused restricting Mr Dinar's experience in different areas and thereby depriving him of the opportunity to be promoted. Here, the Appellant did not complain directly of being deprived of an opportunity not to be promoted however, and by reference to section 25.64 of the same text (concerning the prohibition of causing detriment under section 39(2)(d)) it is clear that "detriment" although not defined in statute has consistently been interpreted to mean "anything which the individual concerned might reasonably consider changed their position for the worse or put them at a disadvantage." In our view the Appellant's claim was for damages for the detriment unlawfully caused to their prospects and ability to perform the duties for which they considered they had been employed. They were not rewarded, through this payment, for services they did perform or would ever perform.

Consistently with the accepted position of both parties the mere fact that the measure of the damage was the financial loss caused cannot create the necessary causal connection between the payment and any services rendered by the Appellant.

In our view whilst the Appellant would not have received the payment had she never been employed by the employer it is plain that a "but for" test is not sufficient. The payment must be a reward for services and for the reasons given it was not.

Given that conclusion the exercise demanded in K+N does not arise.

Accordingly, we conclude that the part of the payment apportioned and attributed to the Appellant's in-employment discrimination claim is not "from employment" and is not assessable under section 62 ITEPA. On the basis that HMRC accept it was not assessable on any other basis it falls outside the scope of income tax.

For the reasons given we consider that the amendment to the Appellant's self-assessment for the tax year ended 5 April 2015 is overstated. The amount which should have been bought into the Appellant's self-assessment for that year, but was not, is £(G+H)x1.5 + I). The parties are directed to agree the quantum of tax due on the £119,200 which should have been bought into account.

The appeal is therefore allowed in part.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.