InMr A v HMRC[2015] UKFTT 189 (5 May 2015), the FTT found that a settlement under a compromise agreement relating to a discrimination claim was not taxable as earnings from employment.
Mr A had worked as a trader for a bank. The issue was the treatment of a £600,000 payment he had received when leaving. He contended that the payment was not employment income, as it was compensation in relation to a threatened race discrimination claim for his unfair treatment in receiving low or no bonuses over several years and no salary increases. HMRC argued that the payment was chargeable as earnings from employment because it was designed to make good shortfalls in salary and bonus (ITEPA 2003 s 62).
Referring to Hochstrasser v Mayes (1959) 38 TC 673, the FTT noted that the test was whether a payment was a reward for services past, present or future. The FTT observed that a settlement under a compromise agreement should be treated in the same way as an award by an employment tribunal. The key question was ‘Why did the employee receive the payment?’ Where damages were calculated by reference to underpaid earnings, while the discrimination may have manifested itself through the way in which the employee was remunerated, the damages arose not because the employee was underpaid but because the underpayment was discriminatory.
In order to succeed, Mr A therefore had to establish that the payment was made by the employer in order (rightly or wrongly) to settle a discrimination claim; and not to pay back money which it thought the appellant was entitled to under his service agreement. However, he did not have to prove actual discrimination.
The FTT considered what the parties had said about the purpose of the payment, how they had acted and their communications with each other. It concluded that the bank had not wished to defend a discrimination claim in court and that the payment had been made to settle the claim. The FTT rejected the bank’s contention that part of the payment represented an additional 2005 bonus, as the payment had only been made after the race discrimination questionnaire had been served by Mr A’s solicitor.
Why it matters: Rather than focusing on what the payment represented, i.e. underpayments of salary and bonuses, the FTT focused on the reason for the payment by the bank. Once it was established that the payment was made to fend off a discrimination claim, the payment could not represent employment earnings.
InMr A v HMRC[2015] UKFTT 189 (5 May 2015), the FTT found that a settlement under a compromise agreement relating to a discrimination claim was not taxable as earnings from employment.
Mr A had worked as a trader for a bank. The issue was the treatment of a £600,000 payment he had received when leaving. He contended that the payment was not employment income, as it was compensation in relation to a threatened race discrimination claim for his unfair treatment in receiving low or no bonuses over several years and no salary increases. HMRC argued that the payment was chargeable as earnings from employment because it was designed to make good shortfalls in salary and bonus (ITEPA 2003 s 62).
Referring to Hochstrasser v Mayes (1959) 38 TC 673, the FTT noted that the test was whether a payment was a reward for services past, present or future. The FTT observed that a settlement under a compromise agreement should be treated in the same way as an award by an employment tribunal. The key question was ‘Why did the employee receive the payment?’ Where damages were calculated by reference to underpaid earnings, while the discrimination may have manifested itself through the way in which the employee was remunerated, the damages arose not because the employee was underpaid but because the underpayment was discriminatory.
In order to succeed, Mr A therefore had to establish that the payment was made by the employer in order (rightly or wrongly) to settle a discrimination claim; and not to pay back money which it thought the appellant was entitled to under his service agreement. However, he did not have to prove actual discrimination.
The FTT considered what the parties had said about the purpose of the payment, how they had acted and their communications with each other. It concluded that the bank had not wished to defend a discrimination claim in court and that the payment had been made to settle the claim. The FTT rejected the bank’s contention that part of the payment represented an additional 2005 bonus, as the payment had only been made after the race discrimination questionnaire had been served by Mr A’s solicitor.
Why it matters: Rather than focusing on what the payment represented, i.e. underpayments of salary and bonuses, the FTT focused on the reason for the payment by the bank. Once it was established that the payment was made to fend off a discrimination claim, the payment could not represent employment earnings.
